Vicky Pryce, author of Greekonomics: The Euro crisis and why politicians don’t get it, on the prospect of mass migration from Greece to the UK if the former is forced to exit the Euro...
The talk everywhere re the Euro has become even more apocalyptic of late. Christine Lagarde of the IMF has irritated the Greeks by telling them off for not paying their taxes and hinted that she worried a lot less about the hardship of the Greeks by comparison to starving children in Africa. And when it was found out that she does not pay any tax herself, given that she is employed by the IMF, an international organization that does not fall under any jurisdiction for tax purposes, the Greeks reacted rather badly firing off letters of complaint left right and centre. And then came another sign of how unloved they seemed to be when the British government started openly talking about contingency plans, should Greece exit the Euro as they expect that millions of Greeks would abandon their homeland and travel to the UK for work, causing even more border chaos during the Olympics!
Stop pressing the panic buttons! The rest of the world has obviously completely underestimated the Greeks' attachment to their mothers 'cooking and to their glorious weather – although the sweltering heat in the UK over the past week may be altering things a bit in this respect! The fact remains though that during the 4 years of big declines in Greek GDP – we are now in the fifth – the exodus has remained pretty modest. And this is despite unemployment of over 20% and youth unemployment at over 50%.
But in any case, when was migration bad for you? Much of the increase in UK GDP enjoyed in the first decade of the new century in the UK came from an influx of migrants from the former Eastern Europe. And the Greeks who would come, if they did, would be educated and willing to work and that would add to the productive capacity of the economy. But what might encourage them to cross Europe to get to the other side of the continent as quickly as possible is precisely that talk/threat of closing the borders to the movement of people and any imposition of capital controls, which the British, but also the Swiss, have been talking about in order to stem the outflow of money that may take place should there be a capital flight from the periphery countries. That would of course strengthen both the pound and the Swiss franc and make UK and Swiss goods very uncompetitive indeed. It would wipe out, for the UK at least, the benefit of the 25% sterling devaluation seen during the financial crisis. But the problem here would not be Greece, which is a very small country accounting for no more than 2% (and declining...) of Eurozone GDP. It is true that there has been a substantial increase in the number of Greeks in the UK who are now either applying or are thinking of applying for British citizenship, worried that the country may have to leave the EU. But their number is very small... The real issues will arise from elsewhere in Europe, and they will be much larger and more difficult to contain.
The perfect example of this is the Spanish banking crisis. This is a country that entered the financial crisis with a healthy budget situation and with a well regulated banking system, that had not been involved to any serious extent with dabbling in dubious off balance sheet financial instruments, the risks of which no-one knew how to evaluate and account for. What did follow though was a sharp contraction in output and a complete collapse in the house building boom which had fuelled much of the lending and growth in the Spanish economy – just as it had in Ireland. It is only now that the scale of the potential losses by the banks is beginning to be realized. And the problem is that many of the banks also hold sovereign debt which has started to look very dubious indeed, and the borrowing rates for Spain have moved dangerously close to 7%, which had been the trigger point for IMF etc bail out for countries such as Ireland and Portugal. The Spanish government is attempting to do some financial engineering to recapitalize one stricken bank, Bankia, which it has had to nationalize to prevent a bank run. But many of its other banks have been downgraded and are finding it hard to obtain funding at reasonable rates. Spain may need to do a lot more and there are calls for the European Stability Mechanism to be directly involved in bank recapitalizations in the future as it makes very little sense for debt stricken countries to borrow at inflated rates to save their banks while adding that way to their debt. The Greek banks have also needed an interim injection of capital to prevent insolvency in advance of the £31b they are due to receive in late June as part of the second bail-out package – assuming all goes according to plan of course.
But the suspicion that the entire European banking system is under increasing threat is pushing interest rates up and British borrowers, both companies and individuals, are beginning to be charged more as a result. Contagion is spreading and is affecting us here directly. If I were in Government I would worry much more about that than the remote prospect of Greeks arriving at Heathrow bearing gifts...
Vicky Pryce is a Greek born economist and former Joint Head of the UK Government Economic Service. You can read more about Vicky's take on the Euro crisis at the Sunday Times News Review - 'Save Greece - with your beach towel' (£).