There
is no shortage of viable plans for a departure from the eurozone or,
in some instances, the EU. All require a measure of fortitude and
adaptability–a willingness to step beyond what is, in fact, a very
uncomfortable comfort zone. The question is whether the Greek ethos
can rise to this challenge.
by
Michael Nevradakis
Part
3 - How to depart: some further thoughts and considerations
In order to
better understand the intricacies surrounding a departure from the
eurozone in particular, certain additional issues require
examination. This analysis will demonstrate that a departure from the
common currency is indeed feasible based on current conditions while
introducing some additional thoughts and proposals to the discussion.
Foreign
reserve assets: As mentioned in Part Two of this series, in the
pre-euro days, European countries with weaker economies, including
Greece, paid for imports of vital goods such as oil and medicine with
foreign currency reserves. This is also how other countries without a
“hard” currency import goods today.
It,
therefore, should be noted that, according to official data from the
Bank of Greece, the country’s reserve assets total 6.378 billion
euros, including 1.731 billion euros in foreign exchange. However, to
this figure we can add the outstanding loans of Greek banks to
external borrowers (approximately 27.4 billion euros as of 2015); the
long-term bond portfolio of the Greek banking system, exceeding 55
billion euros; and the foreign stocks and securities held by the
Greek banking system, exceeding 9 billion euros as of 2015.
Furthermore,
the total circulation of euro banknotes in Greece (an estimated 27.4
billion euros in 2015) would essentially be converted to foreign
exchange, as these notes cannot be canceled. In all, this creates a
supply of foreign reserve assets that, according to Karousos, can
cover Greece’s needs for the next five years, even if no further
foreign reserves were to enter the system.
Balance of
payments and trade: As pointed out by both Lavdiotis and Karousos,
Greece continues to maintain a trade deficit, totaling approximately
15 billion euros. However, the difference is covered by services,
specifically shipping and tourism, which generate foreign reserve and
income for Greece. In short, Greece has achieved a balance of
payments and services.
What this
means is that Greece will continue to be in a position to import
necessary goods and services during and after a transition to a
domestic currency.
To float or
not to float: One of the fears that is often expressed regarding a
eurozone exit is a potentially catastrophic or uncontrolled currency
devaluation that may follow–though this presumes that the new
currency will be floated on the international markets.
Flotation,
however, is not a necessity, and an excellent example exists: China.
Between the late 1940s and the late 1970s, with a gradual rollback
that spanned until relatively recently, China maintained its currency
at an artificially overvalued level instead of allowing it to be
freely floated in the global markets.
What this
did was allow China to import technology relatively inexpensively
with a strong currency–using this technology to promote the
country’s domestic industrial base and to promote domestic
consumption at the expense of exports. Once China’s industrial
machine was ready to take the next step, this import-substitution
model began to be carefully rolled back, opening up Chinese products
to the world and eventually anchoring China as a global export
powerhouse.
Conversely,
in adherence with the aforementioned proposal put forth by Mosler, it
would be possible to allow the new currency to float on the
international markets. The domestic “short squeeze” would then be
likely to counterbalance any downward, speculatory pressures on the
new currency from the international markets. Furthermore, Greece
could threaten to redenominate its debt into its new currency. This
could act as a check against devaluatory pressures on the new
currency, as the debt would, in turn, be devalued.
To devalue
or not to devalue, to peg or not to peg: There are pros and cons to
both options that bear examination. One option is to maintain a peg
with another currency, such as the euro or the U.S. dollar. There are
actually two separate issues here: the initial conversion rate of the
euro to the new currency, and a possible peg of the new currency to
another currency, whether the euro or something else.
Here I will
argue that setting the initial rate of exchange between the old and
new currency is simply a conversion–essentially an arbitrary
arithmetic choice without objective (i.e., non-psychological)
monetary implications. Therefore, it actually should not matter
whether the conversion rate is, say, one euro to one drachma, or one
euro to one hundred drachmas. Either denomination would still be
equal to the initial one euro. This relates to an old economic idea,
that of money illusion, coined in the early 20th century by economist
Irving Fisher, who pointed out the tendency to confuse the nominal
value of currency with its real value.
Here, I will
posit that large denominations, such as those that Greece and Italy
had pre-euro with the drachma and lira, actually are beneficial to
weaker economies, as they serve as a check of sorts upon inflation.
It’s much easier, for instance, to raise a price from, say, one
euro to 1.50 euros (a 50 percent increase) than to, for instance,
raise a price from 10,000 drachmas to 15,000 drachmas (an equivalent
percent increase). The psychology of money should never be downplayed
and, psychologically, a hypothetical 5,000 drachma increase has a
greater impact than a seemingly minor 50 cent increase. So, following
this view, the drachma could be redenominated back at the original
exchange rate of 340.75 drachmas to one euro.
This line of
thinking is similar to the ideas proposed by professors Priya
Raghubir and Joydeep Srivastava. Their 2009 paper titled
“Denomination Effect” found that people are less likely to spend
larger units of currency than their equivalent amount in smaller
units; while their 2002 paper titled “Effect of Face Value on
Product Valuation in Foreign Currencies” found that tourists
underspent when the face value of foreign currency was a multiple of
the equivalent amount in their home currency, and vice versa. This
rule, of course, is applicable not just to tourists: psychologically,
one is less likely to spend, say, 1000 drachmas than the equivalent
amount of less than 3 euros.
These rules
of economic behavior were evident in Greece and some other countries
immediately after the transition to the euro. Amounts that previously
seemed significant, such as 500 or 1000 drachmas (denominations
represented by banknotes), were the equivalent of loose change with
the euro, with amounts up to 2 euros minted as coins. Furthermore,
businesses across the economic spectrum took advantage of this
psychological effect to round up prices while seemingly still keeping
them low. For instance, a 100 drachma (0.29 euro) bottle of water was
“rounded up” to 1.00 euros (340.75 drachmas). Inevitably,
purchasing power diminished almost overnight.
A
post-conversion peg can take place independent of the currency
conversion rate. Here though, it is important to consider that a peg
will tie the new currency to the fiscal policy being implemented for
the foreign currency to which it is pegged. This was the case in
Argentina, which led to the country’s economic collapse in 1999.
Pegging the
new currency to, say, the euro, might have negative consequences: the
euro itself might begin a downward spiral in the markets if one or
more of its members depart. On the other hand, a peg could allow a
country like Greece to essentially do what China did: maintain an
artificial value of the currency for a period of time until the
initial difficulties of the transition to a new economy have been
surmounted.
Capital
controls: In Greece, capital controls have been in place since June
2015, just prior to the July 2015 referendum. These restrictions have
essentially limited withdrawals to an average of 60 euros per
day–having changed during this period from a daily withdrawal
limit, to weekly, to biweekly, to monthly, without significantly
changing the bottom line rate.
The truth is
that these capital controls have posed tremendous difficulties to
Greek businesses in particular. However, in a post-transition period
they might be a necessary evil until economic jitters have been
overcome. If this is the case, what will be imperative is for a clear
and reasonable capital control plan to be developed and to be
communicated to the public, free of the uncertainty that exists with
the current controls that are in effect in Greece, and with a clear
forecast of when they will be loosened and/or eliminated.
Taxes: In a
country like Greece, and with the economy in the condition its in,
less is more when it comes to taxation. Greece’s sky-high tax rates
have stifled consumer spending and have placed a chokehold on small-
and mid-sized businesses, freelancers, and independent contractors.
They have imposed a great burden on households and, ironically, they
have encouraged the practice of which Greeks are stereotypically
accused: tax evasion. For many in Greece today, it’s a simple
choice between paying taxes or paying for bare necessities in order
to survive.
Post-transition,
a new tax regime must be ready to be enforced. One that is simple and
easy to understand and fair to citizens and households, the
self-employed, and to the small- and medium-sized businesses that
have been a cornerstone of the Greek economy for decades.
Stability is
key: in Greece, tax laws invariably change every year or even every
few months, and retroactive taxation is often imposed! This makes it
practically impossible for households and businesses alike to plan
ahead or to make investments.
Furthermore,
the Greek tax system unfairly presumes a certain level of income
simply by virtue of owning a house or property (which may have been
inherited), or owning a car or some other valuable asset—even if
one is currently unemployed. This blatantly unfair practice must
immediately be eliminated.
The
value-added tax on goods–particularly vital necessities such as
food, clothing, medicine, and heating oil–must also be abolished.
Incentives could also be offered to lure back emigrants and
businesses that have fled the country during the crisis.
Privatizations:
The vast majority—perhaps all—of the privatizations that have
taken place in Greece, particularly during the crisis, have been on
blatantly unfair, vulture-like terms that have been completely
unfavorable for the Greek state. Furthermore, many of the assets that
were sold off, such as regional airports or the national lottery,
were profitable—meaning that they provided income to public coffers
each and every year. Many of these assets, such as airports and
harbors, are also of high strategic importance.
Greece
should, therefore, consider following the example of many other
countries by re-nationalizing assets of vital national importance and
assets that were profitable for the public sector. Other
privatizations for non-vital and underutilized assets can and should
be audited and reviewed–and canceled if need be. These assets can
then be retained by the state as part of a public redevelopment plan,
or tendered again at terms more favorable to the state, perhaps even
as a long-term lease instead of an outright sale.
Red tape and
bureaucracy: No matter what currency you use, your economy will be
stymied if it is drowned in red tape and bureaucracy. Traditionally
in Greece, this endless bureaucracy has been employed as a weapon to
curtail any entrepreneurial initiative, such as the many attempts to
develop an automotive industry in Greece.
Simply
starting a business or forming a corporation in Greece can take
months or years. In turn, the judicial system is, to put it mildly,
slow as molasses. Simple “open and shut” legal cases are not
“open and shut” in Greece, and almost invariably last a decade or
more. This is not an environment within which businesses—particularly
small businesses—or entrepreneurs can operate in an optimal
fashion.
In other
words, a change of currency is not enough. A change in public policy
is also in order.
Legal
changes: European Union membership meant that domestic law had to be
“harmonized” with EU law. In order for an exit from the eurozone
and the EU to be a true exit, these laws must be repealed.
But what
about human rights? That’s a question that is often hysterically
asked in Britain regarding Brexit. This is based on the silly
assumption that human rights cannot exist without a supranational
guarantor such as the EU. It also presupposes that the EU itself
protects human rights. As has been determined by the UN and other
bodies, this has not been the case in crisis-stricken Greece.
Domestic law and international treaties are perfectly suitable for
protecting human rights.
In the case
of Greece in particular, what must be repealed are any and all laws
pertaining to the memorandum agreements and austerity measures that
have been imposed. A “clean break” cannot be considered to have
been accomplished barring this. And if it is, for instance,
determined that the economy is not in a position to immediately
sustain a rollback to pre-crisis salaries and pensions, a clear road
map for the process must be presented and communicated openly and
clearly to the public.
Trade: No
one is arguing that a country such as Greece should isolate itself
from the world. But it is clear that EU-style “free trade” has
not benefited the country, with agriculture being a case in point.
Outside of
the eurozone and EU, countries are free to pursue trade agreements
and partnerships with any other country in the world, without the
need for approval from some other institution. Greece, which
maintained strong agricultural trade with Russia, for instance, would
no longer be hindered by EU sanctions, as it would be free to repeal
them. Greece would be free to pursue trade relations with the BRICS
nations, Asia, Africa, the Middle East, Latin America, North America,
and indeed even Europe. But it would have the ability to negotiate
terms more favorable to its economic needs, rather than being covered
by blanket EU trade rules.
One word of
warning here: the BRICS, often touted as saviors, are themselves
proponents of the neoliberal tenets of so-called “free” trade,
including opposition to “protectionism,” which in the realm of
economics has attained the same derogatory status as “nationalism”
has in the political context. But what is protectionism? It’s
merely the practice of defending domestic industries of vital or
strategic significance from foreign competition. Especially for a
vulnerable economy, the ability to protect key industries is
indispensable.
Protectionism
does not mean isolationism: While these two concepts are increasingly
conflated, there is no argument for a country like Greece to isolate
itself from Europe or the rest of the world post-exit. For instance,
visa-free travel regimes can and do exist outside of a supranational
context. International trade can continue. Tourism would still be
welcome. And indeed foreign investment would be welcome, provided
that it was on terms favorable to the local economy and domestic
workers.
Protectionism
can also be viewed as a means of protecting local culture from the
homogenizing forces of economic and cultural globalization. Diversity
and heterogeneity of course neither cause nor imply isolation.
Banking:
This may be the stickiest issue of all. It is likely that, as part of
a eurozone exit, commercial banks may need to be nationalized. In a
sense this has already happened, as Greek banks have been
recapitalized three times with taxpayer monies during the economic
depression. These banks are essentially bankrupt and have been kept
afloat using the tried-and-true logic of “too big to fail.”
Then there
is the issue of the central bank to contend with. Greece’s central
bank, for instance, is largely a privately-owned entity and 94
percent of its shareholders are not publicly known. Reforming
Greece’s central banking system would seem to be the trickiest
issue of all and larger-scale economic changes on a global scale
would likely be a prerequisite for this to occur.
Economic
development: In Greece, a mantra uttered all too frequently is that
“we are a poor country” that “doesn’t produce anything.”
This is not true. Greece is a land blessed with an incredible amount
of natural resources; energy resources (including great potential for
solar and other “green” energy sources); a rich culture and
history; a large shipping fleet; an educated population and an
innovative younger generation; strong agricultural capabilities and
an excellent climate; and an entrepreneurial spirit—despite the
culture of red tape and a supposedly “bloated” public sector.
Greece has much to offer the world, and much to offer its citizens—if
only its potential were to be tapped into.
To take just
the example of tourism’s and the possibilities it offers: despite
record tourist numbers now visiting Greece, there are many types of
tourism that remain largely undeveloped or underdeveloped, including
conference tourism, winter tourism (Greece has numerous ski resorts
and chalets, for instance), natural tourism and camping, medical
tourism, gastronomy tourism, sports tourism and sporting events that
would utilize the country’s underused athletic infrastructure, and
much more.
There’s a
lot of potential in Greece, but the country must be free to tap into
it. As long as it is not in control of its own economic destiny, this
will not be possible.
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