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Myth #6: Exit from the Eurozone would be the worst possible outcome.
[size=14pt]Having your own currency confers several advantages that had become extremely
underappreciated during the boom years of the Eurozone.
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First, there is little doubt among economists that the easiest mechanism for a country to
gain international competitiveness is to have its currency depreciate. With exit from the
Eurozone, cars and i-phones will become more expensive but food might actually
become cheaper. In fact, the introduction of the euro brought distortions in relative prices
that economists to this day have trouble understanding, and the introduction a new
drachma might help partially reverse these distortions. Regardless of that, though, the
benefits of having your own currency as a way of adjusting to international shocks and
international competitiveness are well-known and quantitatively important.
Second, having your own currency implies you tailor monetary policy to the country’s
immediate needs, instead of having it determined by the needs of the most influential
country in a monetary union which are unlikely to be aligned with your own needs. This
is especially important in periods or recession and depression like the one currently
Greece is in.
Third, the experience of the past eighteen months has amply demonstrated that
being in
the Eurozone is incompatible with democracy in Greece and national sovereignty.9 As
discussed above (on Myth #5) following the current path holds more of the same. The
only possibility of remaining within the Eurozone and Greeks having any say is to have
political unification of all the Eurozone countries with full democratic rights for all the
citizens of its constituent countries. That would bring some democratic legitimacy in the
Eurozone, although that would be the end of all national sovereignties. However, not
even political unification is likely, let alone political unification with democracy
Eurozone-wide.
Democratic legitimacy and national determination are not just abstract concepts that are
disconnected to people’s everyday lives and their work. For the merchant it implies the
government’s policy towards banks and liquidity in general takes their interests into
account. For the worker it implies that their concerns for unemployment and inflation
will have to be heard in Athens instead of (not be heard) in Berlin, Frankfurt, or Brussels.
The local industrialist will also have a chance to be heard and influence policy.
Thus, economic reasons, democratic legitimacy, national sovereignty, and even basic
dignity are all related and point to Greece having its own currency. Most of those who
object to exit from the Eurozone are mainly concerned with the costs of transition.
Won’t the foreign debt burden increase even more due to devaluation? How will the
banks adjust to the change in currencies? How will the country import essential items
like petroleum and pharmaceuticals? What will happen to bank deposits? Won’t all this
create total chaos?
Those, and many others, are fair questions to ask. What is important is how competent,
honest, and ready to defend Greek interests will be those who manage the transition; how
fast and flexible will they be in adjusting as unforeseen problems crop up; how able will
they be in articulating their actions to the Greek people so that negative reactions are
minimized. A completely uncontrolled and unplanned exit from the Eurozone will be
chaotic and a lot more painful than a controlled and well-planned one.
Going back to the questions about the transition period, I start with the first one on the
debt burden: As noted above, almost all non-troika debt has been issued under Greek law
and was contracted in the country’s national currency which would have been the euro
before the transition but, after the transition, all financial assets and debts would become
denominated in the new currency at the rate prescribed on the first day of transition.
Legal arguments would be made for and against the denomination of old debts in “new
drachmas” but the ultimate arbiter of this dispute would be Greek courts. Since both
bank deposits and other debts would also become denominated in new drachmas it would
be difficult to argue that public debt should not.
This denomination of debts would also
provide an incentive to other countries not to encourage a rapid and undue depreciation of
the new drachma.
The adjustment of the banking system will take some time with many twists and turns
that cannot all be predicted in advance, but the problems should be manageable. As
former Czech President Vaclav Klaus mentioned, based on the experience of the breakup
of Czechoslovakia and the currency transition there, exiting the Eurozone will not
involve overwhelming logistical problems.
Naturally, capital controls will need to be imposed and other measures will have to be
taken to ration foreign exchange for the importation of essential items.
Bank deposits will automatically be adjusted to the new currency as will be all domestic
debts. Inevitably, net creditors will lose some and net debtors will gain in the short run
but even net creditors might gain in the long run since the economy can be expected to
grow faster than if it were to remain within the Eurozone.
The transition will be difficult and painful but, if managed properly, the pain will be short
term. With its own currency the Bank of Greece and the government will be able to
inject much needed liquidity in a currently dying domestic market due to an extreme
shortage of credit and liquidity. The increased liquidity along with the beneficial effects
of depreciation through import substitution, reduced imports, and possibly increased
exports will bring the economy back to life and increase employment. Of course, the
government will have to negotiate a narrow path between increased liquidity and keeping
inflation within reasonable levels.
While many economists located outside the Eurozone, including figures like Paul
Krugman and Martin Feldstein, recognize the benefits or even the necessity of Greece
exiting the Eurozone, most economists within it have studiously avoided even mentioning
the subject. Some studies by banks present scenarios that are rather bleak. UBS (2011),
for example, claims that Greece’s GDP will be cut in half if it were to leave the
Eurozone. Leaving aside the fact that Greece’s GDP could be in a few years half of what
it was in 2009 by following the path prescribed by the troika, the assumption of the study
is that any devaluation of the new drachma will be immediately matched by increased
tariffs from EU countries. Such a threat of retaliation is also mentioned by others.
The question is who would have an interest in implementing such retaliatory tactics,
coordinating them EU-wide, and what would that imply for today’s world trading
system? To engage in such retaliatory activity, all the EU countries would have to agree,
when some of them would also be seriously contemplating exit from the Eurozone. Why
would they want to effectively foreclose such an option to themselves? Moreover, such a
retaliatory tariff would have serious implications not just for the future of the EU but for
today’s globalized world trading system. It would be the beginning of the end of the
world as we know it and every country would want to protect itself and its people from
the coming tsunami.
That would actually be an additional argument for Greece having its own currency, so as
to maintain maximum flexibility in its economic policies, in a much less globalized and
possibly poorer world.
[size=18pt]
It should be finally noted that the Eurozone is likely to break up regardless of what
Greece does.[/size] The real alternatives are political unification and breakup. Anything in
between cannot be sustained, either politically or economically. Since political
unification is not in the cards, it is largely of question of when and how the breakup will
occur.
In any case, it is highly imperative that, regardless who is in charge of the government,
the Bank of Greece and the Ministry of Finance have teams secretly working on the
scenario of Eurozone exit. That could make the difference between a chaotic exit and a
well-planned one.
Finally, a default and exit from the Eurozone would not have to be done in an overtly
adversarial fashion with Germany and other Eurozone countries. Once such a move
becomes clear or inevitable by circumstances as it might well become,
it would be in the
interest of all parties to make its effects as smooth as possible. There are many economic
and political constituencies within Germany that would find such a possibility welcome
and a mutually advantageous move for Greece, Germany, and for the future of a more
cohesive and sustainable Eurozone. There would be also no reason for Greece to leave
the EU or for other countries to demand its expulsion. The apocalyptic scenarios that are
circulated are sometimes just part of the negotiating tactics used by one side to prevent
another side from doing what they don’t want them to do but they do not necessarily have
much basis in fact.
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9
As developed by Rodrik (2011) and as applied to the Eurozone by O’Rourke (2011), there is a
fundamental political “trilemma” between democracy, national determination, and economic globalization.
You cannot have all three of them simultaneously. By being part of the Eurozone (an instance of economic
globalization), you normally give up some national determination, but in the case of Greece even
democracy has substantially eroded since all major decisions dictated by the troika are voted against strong
popular opposition, and arguably in the case of major votes without the 2/3 majority required by the
country’s Constitution.
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