The Greek Crisis
A Greek exit from the euro could push up inflation and cause an Irish bank run, according to Karl Whelan. eolas considers the potential implications of its referendum.
A country can change its currency in a weekend, UCD economics professor Karl Whelan has predicted, as the debate over Greece’s debt and referendum intensified. Whelan was speaking on The Late Debate on RTÉ Radio 1 after George Papandreou proposed a referendum on the EU’s new bail-out offer.
Whelan added that capital could be controlled by halting electronic bank transfers for Saturday and Sunday and changing the denominations of bank holdings, in Greece’s case to the drachma. The country’s central bank governor would then buy new bonds, in drachmas, causing rising inflation and forcing pension funds to buy those bonds. The credit rating of other EU periphery states would go down, making a “massive flight from Irish banks” possible.
However, he suspected that Papandreou’s move was tactical, to strengthen his negotiating position in Brussels and get more debt written down: “I suspect that there is a form of realpolitik and debate going on behind the scenes that is quite different from what Papandreou is saying in public.”
With a mere two-seat parliamentary majority, the Greek Government’s fall is a real possibility. The centre-right opposition party New Democracy is seeking snap elections and says the Prime Minister is tossing Greece’s EU membership “like a coin in the air”.
It is unprecedented for any country to leave the euro. Indeed, enlargement has hinged on obliging accession states to adopt the currency. Only the UK and Denmark have maintained their opt-outs.
Whelan pointed out that the 50 per cent write down applied only to private debt and therefore equated to around 25 per cent of all debt. A 120 per cent debt-to-GDP ratio by 2020 was “very optimistic” for Greece; this and a higher interest rate put it in a much weaker position than Ireland.
There was no legal mechanism to leave the euro and he expected the referendum question to focus on the debt deal itself. Whelan added: “I don’t think if you had a referendum on the Irish deal, it would pass here even though it’s a more sustainable deal.”
Fine Gael TD Liam Twomey, speaking on the same programme, said that Government had a mandate to act from the general election. Ireland’s position was “nowhere near Greece,” he stated. Sinn Féin has called for a referendum on the Irish bail-out and for Ireland to get a similar write down to Greece.
Greece joined in 2001, while Ireland was among the 11 founders in 1999. Referenda results have usually expressed anti-Brussels views, as seen in Ireland’s first Lisbon referendum (53.4 per cent against). Greeks have not voted in a referendum since 1974, when the monarchy was abolished.
“A grenade” was how Europe Minister Lucinda Creighton initially described the move, wording which she later moderated to “a surprise”. Creighton also accepted that there was “absolutely no question” that Greece was entitled to hold a referendum.
