Why Greece negotiated the wrong issue
1 April 2015
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We can probably safely say that those who still believe that Greece will repay the €320bn+ it owes can be counted with the fingers of one hand.
What is really puzzling is why Greek politicians have been so keen in essentially negotiating what is known as a ‘haircut’, that is, to have a certain percentage of their debt forgiven. The new socialist government will hardly want to submit to future austerity measures dictated by the EU, so the big question is of course, how do they think they will have an independent monetary policy while under the yoke of the euro, even if a “haircut” of biblical proportions is agreed?
We need to remember some of the reported consequences of the austerity measures, such as about 500 Greek mothers giving up their children for adoption because they were unable to feed them, or people getting infected with HIV on purpose in order to qualify for public assistance. Another measure to make food more accessible was decreed by the government, which took the unusual step of officially allowing the sale of expired food at lower prices.
What the new socialist government should have negotiated instead is a Greek exit from the Eurozone. I have written a booklet (The Euro is Dead, Long Live the Solid!) on the issue of and benefits for any country adopting a parallel currency monetary system. In the specific case of Greece under such a system, at the very beginning they could start issuing the new drachma (or whatever the name) to circulate side by side with the euro at fluctuating exchange rates, and to issue at a later time a gold-backed currency to take the place of the euro (which may not exist anymore in the near future anyway). The value of the new drachma will depend on the concrete policy measures taken by the government, but it will certainly constitute what I call a monetary ‘pressure valve’ availing the government some elbow room in the event of need, without destroying the system.
It is obvious that Germany – which I call the Hegemon in the EU – is confronted with a devilish dichotomy, namely, on the one hand she wants to keep her ‘colony’ (Greece) in the fold together with the other ‘colonies’ in Europe, not only to continue selling to them her wares in euros, but also to protect the health of the German banking system which keeps a rather unhealthy amount (€92.7 billion) in Greek bonds. On the other hand, things are getting so bad, even at a personal level among Greek and German politicians, that they may have to push Greece or let her go out of the euro. Greek politicians have resorted to unusual measures to negotiate with Brussels and the Germans, including name-calling, demanding war reparations from Germany (which were, in fact, settled long ago), and the latest being digging up a forced loan which Greece made to Germany during the occupation in WWII.
The euro was from the beginning, and still is, a flawed concept, created by misguided politicians in search of an ill-conceived legacy, cheered on by economists who should have known better but didn’t. The euro frenzy got to such a level that it resembled a country club, of which you had to be a member if you wanted to be somebody, or else become a pariah. That is why Greece (and perhaps others, too) even resorted to cooking the books in order to be allowed to become a member. Luckily, nowadays countries are beginning to see through the euro folly. Very recently, the government of Iceland officially withdrew her application to join the EU, and wants even less to do with the euro. It seems they have finally realised that after all, they do not want to become a member of what used to be a very exclusive club, and what is today hardly more than a circus.
What is really puzzling is why Greek politicians have been so keen in essentially negotiating what is known as a ‘haircut’, that is, to have a certain percentage of their debt forgiven. The new socialist government will hardly want to submit to future austerity measures dictated by the EU, so the big question is of course, how do they think they will have an independent monetary policy while under the yoke of the euro, even if a “haircut” of biblical proportions is agreed?
We need to remember some of the reported consequences of the austerity measures, such as about 500 Greek mothers giving up their children for adoption because they were unable to feed them, or people getting infected with HIV on purpose in order to qualify for public assistance. Another measure to make food more accessible was decreed by the government, which took the unusual step of officially allowing the sale of expired food at lower prices.
What the new socialist government should have negotiated instead is a Greek exit from the Eurozone. I have written a booklet (The Euro is Dead, Long Live the Solid!) on the issue of and benefits for any country adopting a parallel currency monetary system. In the specific case of Greece under such a system, at the very beginning they could start issuing the new drachma (or whatever the name) to circulate side by side with the euro at fluctuating exchange rates, and to issue at a later time a gold-backed currency to take the place of the euro (which may not exist anymore in the near future anyway). The value of the new drachma will depend on the concrete policy measures taken by the government, but it will certainly constitute what I call a monetary ‘pressure valve’ availing the government some elbow room in the event of need, without destroying the system.
It is obvious that Germany – which I call the Hegemon in the EU – is confronted with a devilish dichotomy, namely, on the one hand she wants to keep her ‘colony’ (Greece) in the fold together with the other ‘colonies’ in Europe, not only to continue selling to them her wares in euros, but also to protect the health of the German banking system which keeps a rather unhealthy amount (€92.7 billion) in Greek bonds. On the other hand, things are getting so bad, even at a personal level among Greek and German politicians, that they may have to push Greece or let her go out of the euro. Greek politicians have resorted to unusual measures to negotiate with Brussels and the Germans, including name-calling, demanding war reparations from Germany (which were, in fact, settled long ago), and the latest being digging up a forced loan which Greece made to Germany during the occupation in WWII.
The euro was from the beginning, and still is, a flawed concept, created by misguided politicians in search of an ill-conceived legacy, cheered on by economists who should have known better but didn’t. The euro frenzy got to such a level that it resembled a country club, of which you had to be a member if you wanted to be somebody, or else become a pariah. That is why Greece (and perhaps others, too) even resorted to cooking the books in order to be allowed to become a member. Luckily, nowadays countries are beginning to see through the euro folly. Very recently, the government of Iceland officially withdrew her application to join the EU, and wants even less to do with the euro. It seems they have finally realised that after all, they do not want to become a member of what used to be a very exclusive club, and what is today hardly more than a circus.
3 thoughts on “Why Greece negotiated the wrong issue”
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It saddens me to read a comment like this on the website of the IEA. In large parts this is almost exactly what you can read in left-leaning papers like the Guardian or the New Statesman complete with the usual and gratuitous Germany-bashing.
And again we hear that ‘austerity measures’ are the root of all evil in Greece. The last time I looked countries like Latvia and Slovakia who are assisting Greece quite generously through the ESM had a much lower average life expectancy than Greece itself. This is important to keep things in perspective.
The reality is that assistance from the EU/IMF has allowed Greece to stretch out measures of fiscal tightening over several years as documented by the fact that Greece was running primary budget deficits up to and including 2013. If no such assistance had been made available, the same kind of austerity would have had to occur much more quickly in 2010.
Latvia, unlike Greece, had to frontload fiscal tightening. It also was able to able to return to growth much more quickly. Maybe that was the better option.
Another puzzling aspect of the article is that the author criticizes austerity but also suggests a gold-backed currency for Greece. It is widely accepted that gold-backed currencies impose significant constraints on fiscal policy.
This is the author. I felt compelled to post a reply, due to the fact that your comment contains a series of wrong assumptions, misconceptions and misunderstandings. First of all, austerity measures are called for when natural events cause destruction or misguided economic policies wreak havoc in an economy, and are necessary when there is no other solution available. The current austerity measures dictated by Brussels have caused Spaniards to jump off their balconies to their deaths because they could not afford the mortgage any longer, as well as Greeks taking their own lives. The article postulates the fact that austerity is destroying a generation of Europeans in order to stick to and preserve an absurd, ill-conceived monetary system. Why go through this tragedy when it can be avoided by adopting a parallel currency monetary system?
A supranational currency cannot work in Europe because there are many governments ruling many countries with different needs at different times, making Europe unfit to function as an optimal currency area. Robert Mundel discussed this in his seminal paper Theory of Optimal Currency Areas in the early 1960s. Even the US with only one government has problems because the country is also not an optimal currency area and monetary policies applied by the Fed will affect the 50 states unevenly.
You mentioned how Latvia and Slovakia were graciously helping Greece but failed to mention what Finland and others demanded in exchange causing a big stir, but in any case, all that is entirely irrelevant
You write “……the author criticizes austerity but also suggests a gold-backed currency for Greece. It is widely accepted that gold-backed currencies impose significant constraints on fiscal policy”. Regretfully you either did not read the article properly or you didn’t understand it. What you indicate would never happen because we are talking about a parallel currency monetary system with two currencies which circulate at fluctuating rates of exchange.
The gold backed currency essentially controlled by the market and a fiat currency controlled by the national monetary authorities, the monetary system thus containing what I call a “pressure valve”.
I suggest you read about money competition starting perhaps with publications by F. Hayek on the subject.
Mr Belgrano, thank you for your reply. I agree with you on the eurozone being a sub-optimal currency zone and that it should never have been set up in this way.
I disagree with you on fiscal policy in Greece. You say that “austerity measures…are necessary when there is no other solution available.” I don’t see any other solution available in Greece since the country had no access to bond markets and was still running primary deficits up to and including 2013. As mentioned, the bailout enabled the country to run these primary deficits and thereby to stretch out the fiscal tightening measures over several years. The fiscal tightening in Greece would have had to occur anyway.
I greatly respect Hayek’s writing on monetary competition. However, what he had in mind was to restore monetary discipline through competition. What is the concrete connection to Greece today?
If Greece decided to run both a gold-backed currency and a fiat currency and if the government decided to run a looser fiscal policy the market would soon lose trust that Greece could maintain the gold-backed currency and all it would be left with would be the paper currency. A gold-backed currency is only compatible with fiscal discipline. Therefore, a reversal of the austerity measures would only be possible on a fiat currency and could easily lead to run-away inflation.