The election in Greece this weekend, and the possible victory of Syriza, the left of center party that is against the austerity measures that are attached to the bail-out program negotiated with the troika of the European Union (EU), the European Central Bank (ECB), and the International Monetary Fund (IMF), but wants to remain within the euro, has prompted fears of a final collapse of the euro. Let me say that irrespective of whether Greece will be forced out of the euro, policies to reverse the austerity imposed so far will be needed. Latin America has extensive experience with external crises, and with defaults and devaluation, the Argentinean crisis of 2001-2 being the most recent and dramatic example. Here are some lessons and a short proposal based on these experiences.
Some may argue that Argentina is different, since the world economy started a healthy recovery in 2003, and Argentina exported commodities to fast growing Asian economies, i.e. soybeans to China, while Greece exports services to Europe, in other words, tourism to Germans. So Greece is not Argentina, the world economy, including Europe, the market for Greek exports, is stagnant, and, as a result, Greece is doomed. But one should take that scenario with a grain of salt. Argentina did not grow initially because of an export boom, but by using unutilized capacity. The external constraint was alleviated by the fall in imports, which had been caused by the recession (1998-02) and then by the depreciation. That is, depreciation worked by making imports expensive and allowing local production to surge using spare capacity. That is doable in Greece.
The payment of external obligations must be in euros, but for most transactions euros should be economized. That is what a Syriza, or any other government that wants to negotiate an alternative to the current austerity driven bail-outs, should do. The question that is paramount is how to cut down spending in euros, which will continue to be in limited supply. In Argentina, suspension of debt service payments (default) and rules for the conversion of banking deposits and other contracts to a local currency is what allowed for a reduction in the use of dollars, while expanding spending and reversing austerity in domestic currency. Dollars were only used for the essential imports to keep the economy going.
Forced pesification was a success, since most contracts within the local economy did not require dollars. The same is true in Greece. A banking holiday as Franklin Roosevelt imposed when he assumed the presidency during the Great Depression will probably be needed. The Argentinean process was rather chaotic, I should note, and Greece could do better. As in my suggestion for the de-dollarization in Ecuador (here; subscription required) I would argue for the creation of an alternative currency. I would call it the Greek-euro, to avoid the notion that Greece is abandoning the euro, which the new government will accept in payment to all taxes and legal contracts within the country. The government guarantee would immediately lead to acceptability, and then the Greek-euro should be used for reviving government programs and reversing austerity programs.
Both the New Deal with the Works Progress Administration (WPA) and the recent Latin American experience with social transfers are important. The Greek-euro would be used to pay the increased transfers, the equivalents of the Brazilian Bolsa-Familia or Argentinean Plan Jefes in its Greek version, and would be directed towards spending on a basket of mostly domestic goods, reducing the negative impact on the external accounts. That would lead to a reduction in unemployment and poverty rates, and provide political stability in Greece. Exchange controls are essential, to guarantee that no euros (or dollars for that matter) are used for non-essential consumption.
No doubt inflation will increase with the devaluation of the Greek-euro and the hike in salaries and transfers in the local currency, but as in the Argentinean case it will not be a hyperinflation, implying a real depreciation of the Greek-euro. The advantage of the Greek-euro is that a Syriza government can claim that it will reconvert to the euro any contracts in Greek-euros, and, hence, remain in the eurozone, at a depreciated value, and allow for a renegotiation of the external debt that does not impose austerity. That is, the Greek-euro would allow a Syriza administration to negotiate from a strong position without living the eurozone, and put pressure on the troika’s austerity coalition.
Further, a Syriza government, together with a renovated French Socialist government, may finally get the Germans to agree to increase fiscal transfers, and the ECB to buy significant amounts of Greek government bonds, and eliminate the austerity programs that have been and will continue to be an utter failure. Far from being the beginning of the end of the euro, a victory of Syriza could also lead to the strengthening of the anti-austerity movements in other places, like Spain, and eventually lead to a reformed euro. Hope springs eternal!
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Hi Matías,
Interesting proposals. There is something, however, I am not sure.
Commenting on Paul Krugman’s latest book, Michael Hudson says:
“Mr. Krugman’s blind spot with regard to the debt overhead derails trade theory as well. If Greece leaves the Eurozone and devalues its currency (the drachma), for example, debts denominated in euros or other hard currency will rise proportionally. So Greece cannot leave without repudiating its debts in today’s litigious global economy.”
http://michael-hudson.com/2012/05/paul-krugmans-economic-blinders/
What do you think of this?
That’s what you need. The debt in euros with the current capacity of the Greek capacity cannot be paid. Hence, the need to suspend payments, and reduce drastically their value. Again, for most people in Greece conversion of debt/credit relations to a new Greek-euro currency has no consequences. Rich Greeks holding euro denominated bonds, and willing to spend them in the rest of Europe will be hurt, and so will be German and French banks. Mind you, the easiest (from a technical point of view, not political) would be to just transfer resources from the EU and force the ECB to buy Greek bonds (this is a self made crisis after all). But Greeks cannot wait for that, and kudos for them if they vote a left of center party that says it clearly (contrary to say Spanish Socialists which remain orthodox in economic terms).
(this is a self made crisis after all), The Greeks are running both a Current and primary account deficit. They have deep structural flaws that need fixing. The idea that they can repudiate Austerity and go back to spending more than they make is farcical. They do need a middle ground, as the current one is unsustainable, but the pre-bust lifestyle is permanently a historical experience, and I would like to see what your proscription for budgetary balances to ensure stable economic growth.
” the equivalents of the Brazilian Bolsa-Familia or Argentinean Plan Jefes in its Greek version” is not a lavish life-style that, it is true, a small part of the Greek society might have enjoyed and likely still is, but not the majority. Please do not believe to the racist stories you read on the German newspapers and never forget that the German government was friend especially of the right wing Greek government and corrupted them (there are more than one investigations in Germany about this). Then, of course, in all the south we have too much corruption and, more importantly, lack of civil behaviour by most of the population (I mean, the family or your own interest is more important than the community etc). But you do not change that with moral arguments or by deflation. Only growth can help the development of better institutions, the most difficult task anyway. But you can have growth in spite of second ot third best institutions, I do not provide obvious examples.
Sergio Cesaratto
Dipartimento di Economia Politica e Statistica (DEPS)
Siena
sergio.cesaratto@unisi.it
http://www.econ-pol.unisi.it/cesaratto/
http://politicaeconomiablog.blogspot.com/
Nyongesa, yes the crisis is connected to current account deficits and financial liberalization (see my paper here http://www.paecon.net/PAEReview/issue59/VernengoPerez59.pdf). Still the whole of the Greek debt is less than 3% of the euro area’s GDP, and could be easily financed by the the EU, and interest rates could be maintained at low levels by the ECB (by buying a fraction of the debt). And in that sense the crisis is self made.
Alas, the pro-austerity camp has won http://www.huffingtonpost.com/2012/06/17/greek-election-results-new-democracy-wins_n_1603971.html
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@Matías,
I agree 100%.