Greece 'too big to fail', says Massey economist

A Massey University economist is predicting chaos if this weekend’s election result leads to Greece leaving the euro. Professor Christoph Schumacher says such an event would be a “more significant financial disaster than the Lehman Brothers bankruptcy”, with the impact felt globally, including in New Zealand.

“New Zealand got through the last global financial crisis reasonably well because of China’s increasing appetite for New Zealand dairy and agricultural products, but the situation is different this time,” says Professor Schumacher, co-director of the University’s Auckland Knowledge Exchange Hub.

“China’s economic growth is slowing down and so is its demand for New Zealand goods. The next economic crisis could hit New Zealand a lot harder.”

Despite the global implications of a disorderly exit from the euro, Professor Schumacher says there are positives for Greece if it creates a new currency and frees itself from the austerity measures imposed by the European Union.

“The Greek government could put people back to work by creating projects in an effort to grow their economy,” he says. “Defaulting on its bonds and withdrawal from the euro would give Greece an opportunity to start over. After all, it worked for the Argentineans when they decoupled from the US dollar in 2002.”

The Institute of International Finance has put the cost of Greece defaulting on its debt and leaving the euro at 1 trillion euros. Professor Schumacher calls this a “too big to fail event” that the European community should try to avoid.

“If the cost of a Greek default is in excess of 1 trillion euros, then spending less than that amount to solve the problem seems to offer a viable alternative,” he says. “That could be done with a similar programme to the Marshall Plan, which was instituted by the US government to aid a European recovery after the Second World War.”

The plan, says Professor Schumacher, would be simple.

“The EU should pay down 50 per cent of Greece’s debt as a gift – that would cost about 100 billion euros. Greece would need to commit to the enforcement of new tax laws with stiff penalties for non-compliance, and enact legislation to limit the amount of future budget deficits.

“In return, the EU would create a European fund to provide stimulus packages for Greece, as well as other countries like Ireland, Portugal, Spain and Italy, whose economies are in recession. Surely such a stimulus package would cost the EU less than 1 trillion euros – and also help the troubled economies grow.”

Professor Schumacher says that while austerity measures have clearly not helped the Greek economy, the situation in New Zealand is quite different.

“The Greek economy needs stimulus, which it can’t get if the government is forced to cut spending,” he says. “But our economy is growing – not by much but growing nevertheless – and as long as there is demand for our products, the economy will be in good shape.

“We are now realising the detrimental impact of over-spending on an economic system – last year Spain’s government spent 90 billion euros more than it earned, so now might be the right time for New Zealand to start saving.”