The vested interests have won the battle against the taxpayers in the Greek debt crisis. The risks of Greek profligacy are now spread around EU citizens. They will either bear the costs of default directly or, if the Eurozone inflates its way out of the problem, through the imposition of an inflation tax on holders of euros. This is entirely the wrong approach. It is time for taxpayers to revolt.
Greek debt is not systemic or contagious in the sense that Greek default could lead directly to widespread further defaults by creditors and a failure of the financial system. Individual creditors might be in trouble, but, given the normal haircut we see in a default, losses in individual banks will not be big enough to translate into a collapse of the system, contrary to what is usually argued.
Insofar as there are contagion effects they arise from the fact that the first euro sovereign debt default will make people realise that the EU will tolerate default and that we will therefore get more defaults. But, unless fiscal indiscipline is always going to be rewarded by a bailout, some country is going to have to be the first to default at some stage.
In fact, the only way to save the euro as an economic project is for the Eurozone to stop bailing out the Greeks. If Greece is not allowed to default, its fiscal policy will inevitably be controlled by the EU and we move into the endgame of the euro becoming a political project. This is, of course, what the opponents of the euro in the UK feared. On the other hand, if Greece were not bailed out, it might have been possible to limit the Eurozone to an economic project: other member nations would then not have to interfere in Greece’s fiscal decisions. Eurozone countries should be encouraged to market and manage their debt independently so that each country's debt is valued on its own terms.
It is also important that countries should be allowed to leave the euro without having to leave the EU. It is true that exit from the euro and devaluation is no solution to long-term structural economic problems. The Germans had always hoped that the creation of the euro would lead – out of necessity – to less rigid labour markets so that adjustments to economic shocks could take place without currency devaluations. However, they were naïve in this belief. Instead we have, as Margaret Thatcher’s economic advisor Sir Alan Walters predicted, a tendency towards inflation in some parts of the zone and deflation in others. Unless euro exit is possible, the ECB will have an asymmetric bias towards inflation – the easier option.