Greece has voted against austerity, then in a true example of democracy at work, the government has decided to accept even more austerity from the EU than they rejected. What will happen is anyone’s guess, but there are two interesting developments. The first is the IMF has apparently warned the Eurozone members that what they are imposing on Greece simply will not work. The second is that the European Commission is proposing to use the mothballed European stabilization mechanism to provide the money for the bailout. This means that all EU members have to pay to protect the Euro, irrespective of whether they use it. Great news for Britain, whose objections are being turned away by, as you might guess Wolfgang Schauble, the German finance minister. The mess was caused at least in part by German banks, Germany got the ECB to save them at the expense of Greece, and now Germany wants to spread the consequent price. A vote in the EU will mean all the euro users will vote to minimize their own payments. Truly, democracy at work, where self-interest beats the numerically inferior over the head as often as they can get away with.
The question then is, why did Greece not simply pull out of the Euro? Logically, it should do whatever it can to better its situation, but it seems to have done the opposite. I saw an item on the web by Dimitrios Giokas that claimed there would be twelve devastating consequences if Greece returns to the drachma, and perhaps this sort of reasoning led to this form of stupidity. Let us look at these devastating consequences.
1. Rapid devaluation of the drachma against other currencies. The answer to that is to let it float. Yes, it may drop dramatically at first. In the mid 1980s, a New Zealand government under financial strain (although not as bad as Greece’s) floated the dollar and in an hour or so, it lost over a quarter of its value. Basically, the speculators piled in and shorted it. But, at a later date, they have to cover their bets, so within a month, it started to rise again. Note that none of the speculators will have drachma, so they have to cover quickly.
2. The devaluation will lead to skyrocketing inflation. That is sheer speculation, and it depends on government policy. Hitler defaulted, introduced a new currency, and there was no inflation. On a milder side, when the New Zealand dollar lost a quarter of its value, yes, there was some inflation, but not excessive inflation. On the bad side, as one commentator noted, Greek governments are not very good at doing things, so this one is up in the air. It is not necessary, but it could happen.
3. Capital flight and a sharp increase in non-performing loans. First, there will be no significant capital flight, because it has already flown, and in any case, that can easily be stopped. As for non-performing loans, who owns them? If weak companies go bankrupt, that is sad, but does anyone seriously think that more austerity from Merkel is going to save them?
4. In such an eventuality the wage and pension freeze payment will be inevitable. Not necessarily because the money to pay wages have to come from somewhere, but so what? As for a pension freeze, Merkel the merciless is imposing pension cuts. The author says there will be social unrest. There will be social unrest if there is more austerity. There is no way it would be worse with the drachma, and it might be better. The real danger is with greater austerity the pain level is too great and Greece has a military coup to put in more effective policy implementation. (Whether it will be is beside the point; coups always believe they are the solution, even if they are not.)
5. Gross domestic product will likely shrink to about 2/3 of the current level. Why? Where did this figure come from? I cannot help thinking that this author made up figures to make his case. In any case, bowing to austerity will greatly increase the debt load, and GDP has been calculated to drop by at least 10% of current by respectable economists.
6. The public debt of Greece, totaling 322 billion euros, will increase automatically. Um, if you default, the debt vanishes. Yes, you do not get credit, but so what? The interesting thing about 322 billion euros is, if you are going to default, you do not have the problem: the other banks do. They get nothing if they impose conditions on you that make it impossible to pay back anything.
7. Even if, after bankruptcy, a partial debt restructuring follows, it will not be painless. It will be accompanied by a new rescue package (only from the IMF now) and very burdensome fiscal adjustment measures. Not if you default. Certainly, you get no credit, but remember, you were always in a no-win situation.
8. There will be an equal increase of private debt through the skyrocketing of lending and depositing rates in an effort to control inflation. Interest rates will have to be high, but who is lending? You cannot lend drachma if you haven’t got any, so euros will have to return. There will have to be controls, and some of the regulations will not be pleasant for some, but stamping down on speculators will probably keep this under control.
9 Suffocation of import business due to a weakened market and lack of credit. Certainly, but this is to some extent what is required to get the Greek economy back on its feet, and it is hard to see greater austerity leading to an import boom.
10. Failure of imports will bring shortage of essential items on the market. The “essential items” noted are food, and this is serious. If other countries absolutely refuse to provide Greece with any access to foreign currency, it is in a serious mess, but do countries want to be known as the countries that are starving the Greeks out of spite?
11. Invasion of predatory foreign investors. Not a problem. Prevent them from taking advantage of the situation. Note also that under Merkel’s proposal, 50 billion Euros of Greek assets will be sold. Why is this not a predatory invasion?
12 Diplomatic and economic isolation of Greece, and a problem with defence. Certainly there will be consequences, but defence is not a problem. Greece will remain a member of NATO, and even if Germany would be reluctant to help, can you think of any neighbor that is just aching to take on the US military?
To summarize, in my opinion, people who think like Giokas are stuck in thinking that Greece has to follow their rules. That does not have to be the case. Recall that Germany defaulted several times in the 1920s, then Hitler stabilized it. Quite simply, foreign predators were told to leave, now. Repayments of debt were not paid. Inflation did not go rampant, in fact rather dramatic inflation was stopped. There was no capital flight, and no businesses were allowed to suffocate. Capital flight did not occur, fraud stopped, speculation more or less stopped, and everyone played by the rules to stabilize the country. Of course, this was in part because there was Oranienburg for those who refused to cooperate, and that might be a step too far for Greece, but even under lighter enforcement of rules, you can get out of this. Argentina did. It is not easy, and if the Greeks want to live well, then they will have to accept work and taxes, but there will also be new opportunities. The Greeks have to take them when they arise.
The real problem for Greece is that it has to persuade the Greeks to work competitively and to pay their taxes. There has to be a stop to consumption based on borrowing, and replaced with consumption based on work. There has to be investment and Greece has to develop a more education-based economy. That is the real problem for Greece, but austerity is not going to help in the slightest.