The Greek Tragedy
9. Concluding Remarks
Whichever way you look at it, from its euro accession based on dubious statistics through living on money-printing to the ineffective rescue packages which brought the Dutch Disease to the country, Greece’s euro saga has been a true tragedy. In the half-decade from the spring of 2010, when the bail-out policy began, in blatant disregard of the Maastricht Treaty, until March 2015, public credit for Greece swelled by 264 billion euros, or 174% of its GDP, to now 325 billion euros, or 182% of GDP. And yet its economic output collapsed and unemployment more than doubled.
Five years ago, there were very different opinions about whether Greece’s creditors should be rescued. Whereas politicians hesitantly accepted such a rescue, presumably under considerable pressure from America and after Sarkozy’s exit threat,1 economists gave clear warnings against such a move.2 Former Bundesbank President Axel Weber and ECB chief economist Jürgen Stark resigned from office because of the policy decisions, which they considered misguided.3 Some have speculated that the resignation of German Federal President Horst Köhler, who as State Secretary in the Finance Ministry had participated in the negotiations of the Maastricht Treaty and as former head of the IMF would have liked to have been involved in the decisions, also resigned because of this.4
At the time, the advocates of the rescue strategy had defensible reasons, because of the possible repercussions on the Eurozone and UK banks with exposure to Greece. Today, however, many of them acknowledge that their hopes and expectations regarding the strategy of buying time for Greece have not materialised.
Ireland has indeed recovered, but probably not because of the rescue operations and rather because of the early stage at which its bubble burst (Autumn 2006): the lack of international help available at that time forced it to carry out an extreme austerity policy, through which it depreciated in relation to the rest of the euro area with relative price cuts of 13% (see Section 2). Of this 13%, 12 percentage points were already realised by the end of 2010, when the bailout funds for Ireland became available. Spain carried out labour market reforms and devalued by 6%, but it still has a long way to go. Portugal and Italy, thanks to growing public debt, have continued to inflate as fast as the rest of the euro countries and have not been able to increase their competitiveness, but have at least started with some reforms.5 In Greece, the rescue has manifestly failed, even though some reform steps have also been taken there. The bill is being footed by Eurozone taxpayers and by the Greek population, which is suffering from mass unemployment.
Trying to compensate for the lack of competitiveness by throwing more money at the problem has turned out to be an ineffective strategy that has ultimately only led to postponing a solution to the problems, causing growing frustration among the unemployed in Greece and the taxpayers of other countries. This is the climate that nurtured the radical political forces currently afflicting the international community with their extreme demands and aggressive public statements.
It is now time to implement “Plan B”. This essay has tried to explain why and how this could be done. Whether Greece should leave the euro is its own decision alone. No one can or should try to expel it. Greece is an integral part of the EU and a cradle of European culture. It must be kept within the European community, politically and economically.
However, the Greek leadership certainly cannot assume that the country will continue to be kept above water with increasing funds from other countries as if there were a European financial equalisation scheme, and as if the Maastricht Treaty had established a federal state with joint and several liability. Reassurances that everything would be alright if only the debts were forgiven stand on feet of clay as long as austerity measures are not undertaken to reduce aspirations to a level commensurate with the country’s productivity. Only when these aspirations are reduced to the extent that jobs become sufficiently competitive to make the full-employment trade deficit under normal rates of interest disappear can it be assumed that the country can cope on its own without incurring new foreign debt. As has been shown, this requires another, very significant real devaluation by means of relative wage and price reductions that are at least two-and–a-half times what the country has already achieved.
If a highly asymmetric inflation in the Eurozone does not come about, such a real devaluation without a Grexit is only possible via a strict austerity policy that will impose heavy burdens on Greek society for years to come. Given the complaints from Greece of a “humanitarian disaster” brought upon the nation in recent years despite the huge credit support of the international community, it can be assumed that the willingness to pursue such a policy is non-existent.
To be sure, a country’s aspiration level that exceeds competitiveness can be accommodated if there is a fiscal equalisation scheme compensating for the gap. However, such a fiscal equalisation scheme is an insurance contract based on reciprocity that needs the binding force that is only assured by the formal foundation of a unitary state.6 There is no willingness among the European nations to take such a step.
Greece will thus have to decide for itself whether it can cope in the Eurozone without the credit support of the international community, that is, without new fiscal rescue measures and without further credit from the printing press of its central bank.
If it opts to exit the euro, the other Eurozone countries will surely not object, so that an amicable amendment to the Lisbon Treaty will be possible very quickly. An exit without a treaty change might also be possible if Greece formally remained a member of the Eurozone despite using the drachma. An exit from the euro does not and should not imply an exit from the EU, as some politicians who are weak on economic arguments maintain.
The new currency must be legal tender, however, so that rental and loan contracts may be devalued with it. The introduction of a second currency in the form of modified IOUs would indeed solve the Greek state’s liquidity problem, but would be neither a solution to the competitiveness problem nor would it avert the danger of a wave of bankruptcies in the course of a real devaluation. The advantage afforded by an open vis-à-vis a real devaluation by means of reducing prices is only to be realised when the new currency becomes legal tender. This is sometimes overlooked in the debate over the role of second currencies. Nevertheless, for a transition period, the euro itself could be used as a second currency for cash transactions until a sufficient amount of drachmas have been distributed.
Greece should have the option of re-introducing the euro after a recovery and after achieving an exchange rate that is in line with its competitiveness. It is conceivable that after a waiting period of perhaps a decade the country could return to the Eurozone, assuming that it will by then have implemented the corresponding structural reforms. In any case, the door to the euro should be kept open for Greece.
The possibility of returning to the euro would help Greeks realise that they have not been pushed out, but that their economy has been given the chance to recover. The temporary withdrawal should be seen as something like a hospital stay. The patient takes a temporary leave, recovers and then returns in a healthy state.
The return option would have an advantage in that, together with the improvement of competitiveness through devaluation and the likely onset of economic recovery (Section 7), it would provide incentives to actually implement the necessary reforms. The strategy of inducing Greece to undertake reforms with an increasing amount of public money has clearly not worked. The possibility of returning to the euro could be a stronger and more credible incentive to make up for the omissions of the past.
The return option to the euro would also help make Greece immune to the lure of a stronger cooperation with Russia. Since some politicians seem to be flustered at the moment by arguments from Washington that a euro exit would carry foreign policy dangers, this is a particularly important aspect. The Russia argument is unconvincing, however, because Greece would remain an EU member after leaving the euro, and because many other EU states also have their own currencies. It would be unrealistic to turn all these countries into Eurozone members just to prevent them from being attracted to Russia.
The necessary decisions should be taken quickly, since the Greek government is clearly playing for time in the negotiations. The more time passes, the more wealth Greek citizens will be able to transfer abroad and the more cash they will be able to withdraw from their bank accounts to limit depreciation losses in the event of a euro exit, making Greek state bankruptcy more expensive for the other countries. At the end of April, Greeks held 43 billion euros in banknotes, and the sum of past payment orders abroad as measured by the Target liabilities amounted to 100 billion euros. Both amounts have grown week by week by a combined one to two billion euros, which corresponds to up to 1.0 percent of Greek annual economic output. Seen in this light, Greece’s negotiating position improves the longer the government manages to delay an agreement. To thwart this strategy and to prevent further accumulation of liability risks to other European countries, there is only one method: to stop the ELA loans, which would force the Greek government to impose capital controls.
One last point. Some have argued against a Greek exit by saying that it could succeed so well for Greece that other countries would want to imitate it. This is an odd argument, since it places membership in the euro above the economic prosperity of a country. The euro was introduced in order to secure peace and prosperity for the countries of Europe. It was an instrument of European economic policy, but not a goal in itself. Socialism, too, was once considered an instrument of economic policy. The professed goal was to secure freedom, equality and prosperity. When it became clear that this was not succeeding, the ruling party made socialism itself the goal. The euro brings enough advantages for Europe that it surely does not need to be discredited by a similar ideology.
Footnotes
1 See. Casqueiro, “Zapatero: ‘Sarkozy amenazó con salirse del euro’”, El País, 14 May 2010.
2 See W. Franz, C. Fuest, M. Hellwig and H.-W. Sinn, “Zehn Regeln zur Rettung des Euro”, Frankfurter Allgemeine Zeitung, 18 June 2010, No. 138, p. 10. Cf. Sinn, H.-W., “Euro-Krise: Die Bedeutung des Gewährleistungsgesetzes für Deutschland und Europa”, Sonderheft, ifo Schnelldienst 63, 2010.
3 This was elucidated by Jürgen Stark at a public lecture at the Hanns Seidel Foundation on 22 February 2013 in Munich. Weber made his opposition public already on 11 May 2010; see A. Weber, “Kaufprogramm birgt erhebliche Risiken”, interview by J. Schaaf, Börsen-Zeitung, 11 May 2010, ; see also “Brandbrief: Ex-Währungshüter Stark attackiert EZB-Kurs”, Der Spiegel, No. 3, 14 January 2012.
4 See Deutscher Bundestag, 17. Wahlperiode, Anfrage Peter Gauweiler, Drucksache 17/2223, pp. 56-57.
5 See H.-W. Sinn, The Euro Trap. On Bursting Bubbles, Budgets and Beliefs, Oxford University Press, Oxford 2014, p. 124, Fig. 4.8.
6 See EEAG, The EEAG Report on the European Economy: Rebalancing Europe, CESifo, Munich 2013, as well as H.-W. Sinn, The Euro Trap. On Bursting Bubbles, Budgets, and Beliefs, Oxford University Press, Oxford 2014, especially Chapter 9: “Rethinking the Eurosystem”.