The transcript of Dialogos Radio’s interview with renowned economist and author Roger Bootle.  This interview aired on our broadcasts for the week of February 26-March 4, 2015. Find the podcast of this interview here.

MN: Joining us today on Dialogos Radio and the Dialogos Interview Series is economist Roger Bootle. Roger is a specialist adviser to the British House of Commons Treasury Committee, the founder and Chairman of Capital Economics, he is a regular columnist for The Daily Telegraph, a winner of the prestigious Wolfson Prize in Economics, and the author of “The Trouble With Europe.” Roger, thank you for joining us on our program today.

RB: Pleasure.

MN: Before we delve into our discussion of the Eurozone and a possible exit from the common currency for a country like Greece, what do you make of the latest agreement that was reached between the new Greek government and the Eurogroup this past Friday? Is this a victory for Greece, as the Greek government is proclaiming?

RB: I think this is a game of smoke and mirrors. We still don’t know the final assessment. It looks to me as though Greece has conceded an awful lot, and I have concerns about how the Greek government is going to present that to the Greek people, bearing in mind what was said during the election campaign. But it’s not over yet, there’s clearly a lot of maneuverings yet to be made.

MN: This agreement includes an obligation for Greece to maintain a primary budget surplus, and of course, all of the austerity measures that had been agreed upon by the previous government, at least for the next four months. In your view, can a national economy hope to have any chance of recovery under such conditions?

RB: Well, I suppose it’s possible to imagine an economy recovering with this sort of program in place, but first of all, let me draw a distinction between the austerity measures already in place and the objective of a primary surplus, which is already in place, on the one hand, and on the other hand, increasing primary surplus to, as I understand it, 4.5% of GDP in 2016-17. That’s a pretty big fiscal tightening to enact in a fairly short period of time. I think it’s going to be extremely difficult for the Greek economy to withstand that. Recent figures, of course, have already shown a dropback in GDP after an early recovery. I think the fact of it is, if these measures are pushed through, I think we’ll see further declines in Greek GDP.

MN: Let’s take a closer look at the Eurozone and the way that it has been structured and that it has developed. What structural problems do you identify with the Eurozone in your opinion?

RB: Quite simply, it exists! The fundamental problem began right at the very beginning. That’s to say, it was a mistake, because it unifies two groups of countries which are fundamentally different and have fundamentally different not just problems, but characteristics. So this isn’t just about Greece versus the rest. In my book, it’s essentially about the northern, or if you like, the Teutonic countries on the one hand, and the southern countries on the other. The exchange rates, before, played a very useful role on a number of occasions, which is why, of course, it existed for so long, and which is why we don’t have a common world currency. What countries of the Eurozone have done is abolish exchange rates between themselves, and these problems facing Greece and other countries now are a direct result of that. The difficulties, if I may comment on that, in countries like Greece, but also affecting Italy and Spain and Portugal, are essentially to do with a combination of excessive levels of government debt and a lack of price competitiveness. Now in the past, countries that have been in that sort of position have typically resorted to a weaker currency, which of course now they can’t do. This is only half of the problem. The other half of the problem is that in the northern countries, there you have a mindset, a set of behavioral responses, which is dominated by the urge to oversave and export without importing commensurately. That is to say, to run current account surpluses. I’m referring, of course, principally to Germany, but also to The Netherlands and to some other countries. If you have an exchange rate, it’s like a hinge. These two could live side-by-side, as they did, of course, before the euro. Fix the exchange rate rigidly between these two groups of countries, and you end up with a disaster.

MN: We are on the air with economist Roger Bootle here on Dialogos Radio and the Dialogos Interview Series, and Mr. Bootle, rumors of a so-called grexit, or a Greek exit from the Eurozone, have come and gone for the past five-plus years, during the economic crisis in Greece. This is an option, however, that has been categorically rejected by each government that has been in power in Greece during this period, including the current Syriza-led government which was just elected last month. Do you believe that a grexit would be the best solution for Greece?

RB: Yes. In fact, I think it’s probably the only solution for Greece. It doesn’t surprise me that Greek governments have rejected it. It’s quite common. Indeed, in the world of psychology and psychotherapy, I think it’s known as Stockholm Syndrome. That’s to say, a situation where a captive becomes so emotionally involved with his captor, that when the cage is opened, he doesn’t want to leave. Essentially, what you have here is a political class that’s invested an enormous amount of political capital in membership of the euro, and of course there are dangers and risks in being outside the euro. I don’t want to downplay this, this is not simple. Quite often you find this in economic history, the governing class clings on to the very regime, just as in Stockholm Syndrome, clings on to the very regime which is imprisoning them. Now, there are two British examples I could give you, and I’ll admit Britain isn’t Greece, but there are strong similarities. In 1931, Britain was on the gold standard along with most of the world, and the then-British government did everything it possibly could, public spending cuts, wage cuts, everything to try to keep Britain on the gold standard, and indeed, enacting these cuts effectively split the Labour Party in two, to those who were supporting this policy and those that were opposing it. The government made every effort to stay on the gold standard. Then finally, the pressure became irresistible and Britain, I can’t say left, it was forced off the gold standard. Disaster! Except, what then happened was the fastest rate of growth in Britain’s whole industrial history, as a direct result of that so-called disaster of 1931, and the government resisted it. Second example: 1992. At the time, not many British people, let alone economists knew about the 1931 experience, although I did, and when it came to the crisis of 1992, I thought this would be a repeat of 1931. In 1992, Britain was in the forerunner of the euro, that’s to say the European Exchange Rate Mechanism, the ERM. We were in for two years. We had chronically high unemployment, we had a depressed housing market, the economy was on its knees, and yet here was Britain clinging on to this ridiculously high and demanding exchange rate and imposing very high interest rates. The government fought tooth and nail to keep the Pound in the ERM. They told everybody it would be a disaster if we were forced off. Interest rates would go up, inflation would go up, the whole thing would be a complete disaster. On September the 16th, 1992, what happened is that we were forced off the ERM, forced out of it. What then ensued? Well, funny enough, just about the second-fastest period of industrial growth, we had a strong recovery, things did extremely well, and that day now has gone down in the common recollection of recent British history as “Golden Wednesday.” September the 16th, 1992. Opposed by just about everybody at the time, the Bank of England, the Treasury, the whole commentariat, the whole establishment, they all wanted to stay in the very thing that was strangling us.

MN: There are many who insist that a departure from the Eurozone is not even possible under existing European Union treaties and frameworks, or that a Eurozone exit also means a departure from the European Union as well. What do these treaties actually foresee and what does international law have to say regarding a sovereign right to withdraw from treaty obligations?

RB: I’m not an international lawyer, but my reading of the agreements and treaties is that it’s perfectly possible to withdraw from the Eurozone without being forced to withdraw from the EU, and indeed, I think it’s arguable that it would be illegal for the other members of the EU to try to force Greece out of the EU simply because it withdrew from the Eurozone. Don’t forget, there are plenty of countries belonging to the EU that don’t belong to the Eurozone, Britain, of course being one of them, Denmark and Sweden being others. So you can be in the EU and not be a member of the Eurozone. The other thing to say is that I don’t think the history of European law is a particularly distinguished one. When it comes to political and economic reality, the lords and masters in Brussels, Frankfurt, and Berlin really do what suits them, and then work out the law afterwards. The notion that the law can or should decide this issue, I think is pure and utter nonsense. When it comes down to it, this is about political and economic reality.

MN: We are on the air with economist Roger Bootle here on Dialogos Radio and the Dialogos Interview Series, and Mr. Bootle, there’s lots of fear in Greece over what a Eurozone exit would mean for the country. Let’s tackle some of these fears. Would there truly be a risk, for instance, of hyperinflation or of a catastrophic devaluation of the new domestic currency that would replace the euro?

RB: I think it’s likely that inflation would go significantly higher for a time, and indeed that’s part of the way through which Greece finds some sort of salvation. A couple of key points to make here: first of all, coming out of the euro and letting the currency devalue is not a magic wand which is bound to succeed in all cases. You could make a mess of this, and plenty of countries have made a mess of it. They let inflation run riot, they’ve failed to restrain government spending, and the result has been the devaluation has done no good at all. So that’s on the negative side. In other words, this is a process that has to be managed, that demands strong government with a vision of the end result. But on the positive side, something I think is really not come across at all in this whole debate, you listen to people, you get the impression that somehow coming out of the euro, having your own currency and letting that currency fall on the exchanges, this is almost like some appallingly nasty medicine which might even kill you, it’s going to cause such economic chaos and loss. This is, frankly, economically illiterate. The key point is, as people in Greece know only too well, Greece has suffered a loss of GDP over the last few years of just about 25%. That’s to say, around about a quarter of its output. And there is enormous spare capacity in the Greek economy. We can debate exactly how much it is, whether all of that quarter could be regained or not, but it’s very, very large. Now, when the exchange rate falls, the effect of this and it’s the intention of it for countries who choose to devalue, the effect of this is to deter domestic consumers from buying goods imported and services imported from abroad, and to encourage foreigners to buy goods and services produced by this country, in this case Greece. In a number of cases historically, it’s been very difficult to enact that process without enormous inflation because, frankly, there haven’t been the spare resources in the economy to be diverted into increased net exports. But that’s not the Greek situation. There’s hardly any example, since the 1930s, any example in the world of a country having suffered a drop of its GDP of about a quarter, about 25%. So I’m in no doubt myself, about this, as long as the government doesn’t blow it, far from causing increased misery or depression, a devaluation, an exit from the euro, can bring the economic equivalent of salvation. It could be the mechanism which leads to an increase in GDP, and this is the point which, time and time again, it seems to me the bankers and politicians in Frankfurt, Berlin, and other places don’t seem to get. They think debt sustainabilities and all about austerity and interest payments and so on and so forth. Frankly, it isn’t. That’s the small change of these affairs. The key thing about sustainability is, quite simply, income. If Greece could recover its previous level of income, then the primary surplus would soar way beyond the numbers that are trying to be imposed upon it, and similarly, the debt-to-GDP ratios would plunge. The key to all this is getting economic growth in Greece. If you get that at a decent level, this problem will be solved.

MN: There is also a logistical issue that is often raised, about how Greece would be able to plan a transition to a new currency and whether the planning as well as the printing and the minting of the new currency should take place in secrecy or if it should take place with public knowledge, and whether it would even be possible to keep something like this secret for very long. What are your thoughts on this?

RB: Well I think that in an ideal world you’d keep things secret. That would minimize panic and disruption and would minimize the need to impose capital controls and to close banks. However, I think this crisis has gone so far, is so far advanced now, the chances of keeping it secret are pretty slim, except for perhaps a day or two at most. So, if Greece is to come out of the euro, what I think will happen is that at some point or other, probably a weekend but not necessarily a weekend, an announcement will be made to the effect that the banks are now closed, there are capital controls, and whatever was previously held in a whole series of financial instruments, including bank deposits, as so many euros, was now held as so many drachmae, or whatever you want to call your new currency. With regard to the printing and minting issue, I think this has received rather too much attention, more attention than it deserves. It is an issue, but it’s not, in my mind, these days a very big issue, and the reason is that a huge proportion, a majority of transactions by value in a modern economy, are in some sense done electronically: credit cards, debit cards, bank transfers, a whole series of ways of making payments. Cash payments are a relatively small part of an economy, and all of those other things can take place without the use of notes and coin, and indeed in an economy where there aren’t many notes and coin, that’s what you’d find, you’d find more and more transactions being done, in some sense, electronically. Now for those transactions which had to take place by notes and coin, if Greece was to come out of the euro, I suggest and I suspect that what would happen is that euros would continue to be used for those transactions, and you might, for a time indeed, have a dual pricing system operating in Greece, where traders would say, would give a certain price for payment in cash with euros, and another price for payment with a debit or credit card in drachmas. Now that’s by no means ideal, but then we don’t live in an ideal world. You can’t print and mint overnight. We’ve done a study to suggest it’s going to take months to have a full supply of notes available, whether it might be 2, 3, 4, 5 or 6 months, I don’t think that’s a problem that’s at all insurmountable. You’d simply make do for a time without drachma notes and coins.

MN: We are on the air with economist Roger Bootle here on Dialogos Radio and the Dialogos Interview Series, and Mr. Bootle, there are also many persistent fears regarding a possible bank run, either upon the announcement of a Eurozone exit or upon the introduction of the actual new currency that would replace the euro. There’s also fears, of course, that as a result of this bank run that banks in Greece would become insolvent. Is bank nationalization an option that you believe should be considered in this case, and what other policy options exist as well?

RB: I think that bank nationalization is a possibility, but I don’t think it’s necessary. What you might have to do is close the banks and put capital controls on, but I think for a fairly short time. The key thing, which again is not widely appreciated, is the benefits of monetary sovereignty. If you have your own currency, you, the central bank, can issue it. Now Greece doesn’t have its own currency and can’t issue it, it’s using the euro. Once you make a transition to the drachma or new drachma, then the central bank of Greece can print this stuff ad nauseum. So banks get into trouble, the Central Bank of Greece, National Bank of Greece could supply credit lines to those banks. That’s exactly what happened, of course, in other monetary sovereign countries like the UK, when we had the international financial crisis of 2008-09, the central banks of Britain and America and Japan have been engaging in quantitative easing, that’s to say, buying a financial instrument, principally government bonds, with effectively newly-created money, not printed usually, but electronically-created, it’s the same thing. This could be done quite easily. So I think that fear is grossly exaggerated. Now, if banks got into certain difficulties and some of them might do, because they have a mismatch of assets and liabilities in euros and drachmae, then it might be necessary for the Greek government to indeed nationalize those, actually to recapitalize them. But that’s perfectly possible. To come back to this point about growth and GDP, the ultimate guarantor of the quality of assets, whether they’re owned by banks or other people, is the state of the economy. The very tendency is to isolate financial things as though they operate in another world. They don’t. You can’t get blood out of a stone. If an economy is not there producing decent levels of GDP, you can have bank claims on it until the cows come home, but they will not be honored. The way to improve the credit ability of Greek assets and the strength of Greek banks is to have strong economic growth in Greece, and I think that under current policies that’s impossible, and I think with Greece out of the euro, with a much lower exchange rate, I not only think it’s possible, I think it’s highly likely.

MN: What kinds of policies could be enforced to bring about this strong economic growth, and what would the impact of a return to a domestic currency be on businesses, small and large, and on wages and pensions in Greece?

RB: The first impact of a new currency and a devaluation will be to raise the price of imported goods and services, so a lot of people would suffer a decline, an immediate decline in their real incomes, as prices in shops went up. Now actually, I think there will be scope, quite considerable scope, for the Greek government to offset some of that effect by lower taxes or increasing benefits for vulnerable people, and the reason there will be this scope is not just because they will no longer be subject to the austerity regime imposed by the troika, but also because of the benefits of real economic growth. One of the consequences of growth in the economy is that money flows in to the exchequer. So in the Greek case, here you are focusing on, the troika is trying to get you to focus on getting up the primary surplus to 4.5% of GDP. If the Greek economy were to grow over the next several years very strongly, you will go way past 4.5%, not through austerity measures but simply as a result of more taxes coming in to the exchequer. So I think there’s scope to offset, actually, some of this initial squeeze on real incomes. But it will be important that the government didn’t go all the way. In terms of the effects on Greek industry and business, Greek industry and service providers would immediately become much more competitive. Let’s say the exchange rate falls by 25%, which I think is perfectly plausible. That means, to a foreigner buying Greek output, it’s immediately now 25% cheaper. So I think you will find a surge in tourism, tourists coming to Greece, they will be diverted from other destinations, from Turkey, from Italy, Spain, Portugal, and other places towards Greece. Also, within the Greek economy, you will find Greek consumers trying to find Greek alternatives to goods that they were importing from abroad. So lots of businesses would, I think, before very long experience much stronger business conditions, and that will of course, in time, lead to increased employment. It will also, I think, lead to higher wages in those sectors. Now again, it’s important that wages don’t go shooting up, otherwise you’ll offset the benefit of the devaluation. But there would be scope for increased wages in those industries which are growing as a direct result of the improvement in competitiveness.

MN: We are on the air with economist Roger Bootle here on Dialogos Radio and the Dialogos Interview Series, and Mr. Bootle, there is, of course, the matter of Greece’s debt to contend with as well. How would the debt issue be tackled upon a return to a national currency, and as a second part to this question, do you believe that an audit should be conducted of the Greek debt?

RB: I think an audit of the Greek debt would be a good idea, but if it’s an audit just in the way that, as it were, an accountancy firm does an audit, it would be limited, it’s benefits would be limited to the benefits you get from that sort of exercise, that’s to say you won’t get to the fundamental economics of all this. It’s the fundamental economics of it that I think are extremely important. Now, first of all, let me say that the troika isn’t entirely mad or even wrong. There are certain things that have happened in the Greek system over recent years which have been less than wonderful: the collection of taxes not being good, certain parts of society have been able to escape without paying a full amount of tax, there’s been a considerable waste in the management of government spending and public employment, all those things are true. And the sensible for thing for a Greek government to do, after an exit from the euro, the sensible thing to continue with good husbandry of the public finances. Having said that, we then come to the question of default or not, and what would happen to Greek debt. I think that would be a case that it might even be necessary, after an exit from the euro, for Greece to default on some of its public debts. Greece, of course, has done this before, many other countries have done it before, it’s not the end of the world. Obviously it’s not what you want to do in the best of all possible worlds, but Greece is not in the best of all possible worlds. The most important point is the point I’m trying to make about the state of the economy. If the economy returns to health, with rapid rates of economic growth, the debt problem is going to be transformed. Now my own country, Britain, I know it’s different from Greece, but we’ve had, twice actually in our history, a debt ratio which makes the current Greek ratio seem small by comparison. Twice, we’ve had a debt ratio of 250% of GDP, both times after wars. First of all after the Napoleonic wars, 1815, and secondly after the Second World War in 1945, and in both occasions, we worked that debt ratio down as a share of GDP to very low levels and without default. How? Well, the government kept tight control of its finances, but the key thing is economic growth. Continued economic growth brings the debt ratio down. So if Greece was able to secure decent rates of economic growth, even though the debt level is very high, I wouldn’t think it was unsustainable.

MN: Now, in wrapping up, what would the impact of a departure from Greece or any other country from the Eurozone be on the Eurozone itself. You’ve suggested that this might actually be beneficial for the stronger economies and that it might create an optimal currency area amongst those countries.

RB: Yes, what happens to the rest of the Eurozone would depend very much on how Greece managed, and I’m trying to indicate this is not certain. You can’t, as it were, hope to leave the euro, have your own currency, go on a spending spree willy-nilly and pay yourself 40% more and expect the whole thing to work. It, under those circumstances, would fail, but the hypothesis I’ve put forward is that I think a new currency and a devaluation could work for Greece. Work in the sense that it would bring decent economic growth, and that would then start to improve the position of the government’s finances. Now if that happened, this would have enormous implications for the other countries in southern Europe. The voters in Italy and Spain and Portugal would look at this experience and say “look at that, we can do it, there’s another way!” Growth is the key, we’re not getting growth under these austerity programs, and I think that there’s a very good chance that Greece would lead the way to a euro exit by those other countries. Now, if that were to happen, if you had Greece, Italy, Spain, and Portugal out of the euro, with an exchange rate between those countries and the countries of the northern core, obviously the northern core, their exchange rate would go up, their exports would become less competitive, prices would fall in the shops in those countries, consumers would become better off, and consumer spending would rise. This would be a benefit not only to the south but also to the countries of the northern core. It astonishes me the way this aspect of the issue is not generally perceived in Europe. In Germany in particular, they say “oh it’ll be a disaster if the euro were split in this way and the new northern currency, whatever it was, went up on the exchanges. How would we cope?” My reply to that is very simple: this would be, effectively, a return to the sort of system that you had under the Deutsche Mark. And that was a disaster, wasn’t it? Remind me, I’ve forgotten my German economic history, but I think under the German deutsche mark you did very badly, didn’t you? I mean, your exports were clobbered by rising exchange rates, German consumers did very badly, wasn’t German at the bottom of the growth leagues in that period of the Deutsche Mark? That’s why you were so keen to give it up, wasn’t it? This is the point they fail to realize. Actually, having a stronger currency, for them, and a weaker currency for the southern Europeans is not only a benefit for southern Europeans, it’s also a benefit to them, because of the nature of the country and the people that they are. They have a natural tendency, export very hard, save very hard, and I’m not saying that’s wrong. What I am saying is, it doesn’t work very well, that set of behaviors, if you’re then chained together with a group of countries whose habits and institutions and histories are altogether different. So in the world I’m describing, in which Greece leaves and leads to an exit from the euro by the southern European countries, and the northern ones, led by Germany, experience a higher exchange rate, what that leads to is stronger consumption growth and higher living standards in northern Europe. I think one has to look at this at a world level. Around the world yes, there have been certain economic problems, we all have suffered from the financial crisis of 2008-09, but look, America is recovering, Britain is recovering, China is still growing, albeit more slowly than it was a few years ago, now oil prices are substantially lower. What’s the part of the world where economic performance is worse? Quite simple: Europe. Now I wonder what reason we can possibly come up with for that? Gee, you know, I find it very difficult! What is there about Europe that makes it stand out? What could possibly explain the fact that Europe has done so badly? Well, we should ask that to Chancellor Merkel and the others. Personally, I’ve got an answer and it’s quite simple: the euro. The euro is the reason, the single, simple reason why Europe has done so badly over the last decade.

MN: Well Mr. Bootle, thank you very much for taking the time to speak with us today here on Dialogos Radio, and thank you very much for your very detailed analysis of this issue.

RB: Thank you very much.

Please excuse any typos or errors which may exist within this transcript.