Gavin McCrone: Euro exit for Greece is vital Bail-outs and more austerity are not enough - exit from the single currency so it can rebuild its economy is what Greece really needs right now, writes Gavin McCrone The Dalai Lama, speaking in St Paul's Cathedral earlier this month, pointed out that the recession from which we are all suffering was made by man and not by God. The implication was that man can also fix it. As the Greek crisis reaches what may be a climax, with grave implications for all of us, let us hope that Europe's leaders can agree on a course of action that will fix it once and for all. It will require more decisive action than we have seen so far and a willingness to give up national prejudices for what is right for Europe as a whole. Had the eurozone countries been more integrated economically, the crisis would probably not have occurred, or at least been far less serious. The problem is that for a monetary union to work there has to be much more integration than just a single currency. In the monetary union of the UK for example, we have never had to face the problem of the whole union being destabilised by the inability of Northern Ireland, Wales or Scotland to borrow to finance its public expenditure. This is because most government borrowing is done for the UK as a whole. In the eurozone, had all governments borrowed in common eurobonds, the financial situation of member states would have been transformed. There might still be problems, just as there have been in the United States, but they would be manageable. The necessary counterpart of this, however, would be a greater degree of central control in the management of the economies of member states. This would be necessary to avoid accusations that less financially responsible states were taking advantage of low interest rates to ride on the backs of the more responsible - in effect, being subsidised. To be effective this would have to include agreed control not just of public borrowing but of private borrowing as well, plus measures to ensure that member states remained competitive with each other. It was because this was thought to be impossible or unacceptable that an alternative means of avoiding the problem had to be found. Hence the adoption of a no bail-out rule and a European Central Bank that was precluded from acting as lender of last resort directly to governments. So what we have is a monetary union without the accompanying measures to make sure that it works. The consequences have been catastrophic. It is very clear now that much more stringent conditions should have been applied before Greece was allowed to join the euro. The blame lies not just with the Greek government of the time, which manipulated its economic statistics to meet the entry criteria, but with the European Commission for not exercising due diligence in appraising it application. But what is happening now in that country is quite unacceptable in Europe of the 21st century: unemployment at record levels with youth unemployment at 50 per cent; wages and pensions savagely cut (by 40 per cent in some cases); businesses collapsing and the output of the economy shrunk by around 20 per cent. Yet the country is still unable to pay its way and more austerity is demanded. Greece's social cohesion is being put at risk, as it would be of any country in similar circumstances. The only similar case that comes to mind is the economic collapse of Germany following unrealistic demands for reparations after the First World War. What is to happen now? If Greece defaults and leaves the euro, the repercussions will be felt not just in Greece but all over Europe. This could happen despite what politicians in Greece or the eurozone want if there is run on Greek banks before the June election. Already large sums have been withdrawn and people are moving money abroad. This might become a torrent at any moment and would trigger the worst kind of messy default. Banks in Greece would fail and controls on capital movements would have to be imposed. People would lose their savings. But there would still be austerity because, even without interest payments on its debt, the Greek government would be unable to meet all its current expenditure from revenue. Public sector salaries would be unpaid; the new drachma would depreciate heavily, risking inflation, and imports would become unaffordable. Elsewhere in Europe, action has been taken over the last year to try to strengthen the funding of banks, but, even so, banks holding Greek bonds would be affected and some might have to be recapitalised by their governments. The IMF, the European Central Bank and the European Financial Stability Facility, which have all been involved in supporting Greece, would lose heavily, with potential costs to other EU countries. More serious still would be the risk of contagion to other eurozone countries. Spain, Italy, Portugal and possibly Ireland would be picked on by speculators betting that they too might leave the euro. It is not hard to imagine a situation in which the whole eurozone begins to unwind, causing chaos. And the UK would be seriously affected, as Europe is our largest export market. So what is the alternative? Further bail-out money from the IMF and the EU plus yet more austerity is no more likely to end the crisis than the measures taken so far. All over Europe the policy of more and more austerity, driven by Germany, has failed. For this reason I welcome the election of François Hollande as the new French president and hope that he succeeds in shifting European policy in favour of growth. One cannot solve a deficit and debt problem by depressing the economy, thereby reducing its ability to pay. Greece has been living beyond its means for many years, financed by much cheaper credit on euro loans than it would have had to pay in its old currency. Sooner or later this has to stop, but to do this its economy has to grow rather than contract. The normal remedy in such circumstances is devaluation to restore the economy's competitive position. But this is impossible with a single currency shared with other eurozone members. Since joining the euro, unit labour costs in Greece have risen by about 30 per cent more than in Germany. George Papaconstantinou, Greece's former finance minister, has said that about half of this loss in its competitive position has been recovered through reducing prices and wages. While this is welcome, it is not enough and has involved a large amount of distress. I believe that Greece will have to leave the euro simply because I do not see otherwise how it can get back to growth and restore its economy. That will not be popular in Greece, as was interestingly demonstrated in a recent television programme where Michael Portillo, himself a eurosceptic, interviewed people all over Athens and could find no-one wanting to go back to the drachma. But I fervently hope it will not be a messy forced exit and default. The danger is that other European countries, angry at default and worried at the effect on their own taxpayers, would give no help when generous help is badly needed. They need to realise that it is in their interest to minimise not only the economic but also the political fall-out, from which only extremist parties would benefit. It is a time, more than ever before, to show community spirit in the EU. Angela Merkel was right to say that more Europe is needed rather than less. But instead of the repeated bail-outs that have taken place so far to keep Greece in the euro, the money would be better spent helping Greece to leave the euro in an orderly manner and supporting it through the inevitable major dislocation. This needs a proper plan, worked out in secrecy, and quickly implemented. Is the political leadership of Europe far-sighted enough to rise to this challenge? Gavin McCrone was formerly the chief economist at the Scottish Office.