Gracious Grexit

Norman Lamont famously sang in the bathtub after sterling was ejected from the European Exchange-rate Mechanism in 1992. As well he might have - liberated from the shackles of an artificially inflated exchange rate, the UK economy quickly pulled itself out of the doldrums and embarked on a long period of expansion, for which Mr Lamont's successors were only too happy to take the credit.

It was the same in Asia in the late 1990s. Thailand, Malaysia, Indonesia, South Korea and the Philippines all had currencies pegged to the dollar at unsustainable levels, with rampant consumption growth and over-investment financed by inflows of hot money. Unpicking all that entailed a bit more pain - there were big falls in stock and property markets, there was social unrest. But within a few years the Asian economies recovered, strongly in many cases.

So would leaving the eurozone be a disaster for Greece? Not everyone's convinced. "There is an overlooked scenario in which default is not a disaster for Greece," wrote Arvind Subramanian, an eminent academic, in the Financial Times this week.

True, the immediate problems arising from a Greek exit would be substantial. It's one thing to be locked into an inappropriate exchange-rate regime, quite another to have given up your national currency completely. Contracts would have to be renegotiated, and banknotes reissued. There would be substantial devaluation, domestic inflation and a banking collapse. Greece's primary budget deficit would remain, whether in euros or drachmas, and Greece is not a big exporter, so might not benefit as much from a weaker currency.

Then there's contagion: the idea that a Greek exit will prompt capital flight from countries like Spain, Portugal and Italy, and cause more problems in Europe's banks. But Greece accounts for 2 per cent of eurozone GDP; its economy is about the same size as Colombia's. Even its biggest bank only ranks 96th in The Banker's Top 1000 World Banks. Its stock exchange is number 44 in the world, smaller than Morocco's. This doesn't strike me as a 'too big to fail' problem.

Yes, the global economy was better placed to deal with Asia's defaults - the US had a balanced budget, a buoyant economy and low inflation, world trade was booming, raw materials were cheap as chips. The financial crisis was a decade away. The picture is not so rosy now.

But I suspect the consensus view of impending meltdown exists for two reasons. One is that a Greek exit is so politically humiliating (unless you're a Brit, a Swede or a Dane). The other is that riots make better television than men in suits saying "actually, we can handle this." Whatever the reason, I think it's worth questioning the consensus.

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