EconoMonitor

How and Why Greece Will Leave the Eurozone

This post is a continuation of the ideas for a Greek exit for the euro zone that I published on Friday. This post, however, also incorporates specifics that Marshall Auerback has laid out in a separate post and demonstrates why exit is the likely option.

Now, the Greek exit scenario I outlined on Friday is identical to the one I proposed in November for Italy when serious policy makers were toying with the idea of letting Italy enter a Greek-style death spiral. In Italy’s case, the country is too big to fail. Anyone who has tried running through Italian default scenarios understands immediately that Italian default equals a global Depression. This is why questioning Italy’s solvency leads inevitably to monetisation. The ECB has now stepped in and monetised the debt and will continue to do so.

Before we continue to Greece, I do want to flag something about the Italian situation that I wrote when explaining the monetisation route we are on in November.

Italy’s problem is this: Italian government debt is almost 120 percent of GDP, behind only Greece within the euro area. Meanwhile, Italy pays 6.5% for its long-term debt. If interest rates were to remain at current levels for an extended period, Italy would need to run a primary budget surplus (excluding interest payments) of about 5 percent of GDP, merely to keep its debt ratio constant.

As a reminder, the plan is to have Greece’s private sector creditors reduce their claims enough to get Greece to this level, which the EU is calling sustainable. My suspicion is that the 120% debt target for Greece is largely a function of not wanting to suggest that Italy’s debt levels are too high.

That last bolded sentence is the key one. It tells you that Italy’s is a question not just of liquidity but solvency as well. For the time being, the solvency issue has been laid to rest by the ECB’s intervention. However, the euro zone is on a very pro-cyclical fiscal course. And this decreases GDP without any obvious growth offset, meaning that deficits will continue and Italy’s debt burden will grow under the current EU policy framework. It is highly likely that the solvency question for Italy will again become acute very soon.

It was refreshing to see Wolfgang Münchau reach similar conclusions in his recent piece in the Financial Times. He writes:

for argument’s sake, let us assume that Mr Samaras will stick to the programme and that a debt trap can be avoided. Everything works as officially planned. Would that be the end of the Greek crisis? In that case the Greek debt-to-GDP ratio would fall from over 160 per cent today to about 120 per cent of GDP by the end of the decade.

But this will still be far too much. We should remember that 120 per cent is a political number that lacks economic justification. It is no coincidence that this happens to be the current Italian debt-to-GDP ratio. If one admitted that 120 per cent was not sustainable for Greece, one might create a presumption that the same was true for Italy.

-Why Greece and Portugal ought to go bankrupt

However, Wolfgang’s conclusion from this is the same as mine: Greece and Italy are different. Italy is a country with a primary surplus and a dynamic export base. It has a real shot at reducing its government debt levels in a less pro-cyclical fiscal environment. On the other hand, Greece not only lacks basic economic infrastructure on things like taxation to raise the revenue that would reduce the debt quickly, unlike Italy, Greece has been running a primary budget deficit across the business cycle. It is clear to everyone then that cutting expenditure and raising revenue poses a real challenge that Greece cannot meet. In Greece’s case 120% debt to GDP is still too high. Wolfgang concludes that a cut to 60% of GDP in the case of Greece (and Portugal) is the only way to give them a fighting chance. He says do it now because waiting two years would be “ruinous” as the riot scenes in Greece right now make clear.

Even so, Greece will have to exit the euro zone. Here’s why:

The Maastricht Treaty and the Lisbon Treaty clearly state that the goal is to “ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States”. This convergence has not come to pass and so now we are in a major crisis. It is becoming increasingly clear that convergence will never happen. The euro zone is unworkable. It needs tighter fiscal integration to succeed and it can’t have that unless it gets convergence. The Europeans are starting to recognize this and so breakup is now inevitable.

-Euro zone breakup is inevitable

Unless you have true fiscal integration and convergence, Greece will continue to run current account and budget deficits even after the initial cut is made. So the problems we see now are endemic and they will re-occur. Marshall Auerback gets at why in a post at New Economic Perspectives on why “A Default is a Better Outcome Than the Deal on Offer.”

He writes:

Greece is a hopelessly uncompetitive economy that probably shouldn’t be in the euro zone. But can you surgically detach Greece if it defaults, without some sort of impact on the entire euro payments system?

And what will the impact be on Greece itself? The country currently runs a primary budget deficit (excluding interest payments on debt) of around 5% of GDP. Were it to default, Athens would be forced to go cold turkey (“cold Greece”?) until the primary fiscal deficit (now around 5% of GDP) is balanced. Maybe the government could suspend all military expenditures as a first pass? At the very least, they can stop buying German military equipment!

No question, that under a default, a lot of public sector employees will be sacked, pensions will be at risk, and unemployment will almost certainly go higher. But that is certainly going to occur under the deal now being struck.

Convergence between eastern and western Germany took twenty years after true fiscal and political integration and trillions of dollars in investment and solidarity taxes. That’s the kind of hard slog and commitment we are talking about here. Politically, this won’t happen. So, plans for Greece to exit will become the default scenario.

Marshall writes what the benefits of that exit would be:

Were the country to revert to the drachma, however, they would likely be left with a substantially weaker currency, which could ultimately provide the country with the wherewithal to compete in the global economy. With a super-cheap exchange rate, Greece could become a Mecca for retirement homes, research hospitals, trans-European liberal arts colleges, and maybe low-overhead software startups. Plus, a permanent home for the Olympics. It could live happily ever after, as Florida does, on the pension income of the elderly and the beer money of the young.

This would be the source of the foreign transfers that the private banking sector won’t make anymore. In Greece’s case that credit went to the public sector and a lot of it built useful infrastructure, so it’s not a waste, but the first step is surely to cancel the debts and stop the illusion that they can be paid. And it would end the “death by 1000 cuts” currently being imposed on the Troika, which will serve no useful economic, political or social purpose.

Of course, there will be a slew of defaults and an endless series of court cases, litigation, etc., much as there was when Argentina defaulted in 2001. But it would force the issue of debt restructuring on the table in a meaningful way and at least provide Greece with light at the end of the tunnel.

Now, the problem is getting from here to there. Likely this will mean state coercion to drive out other media of exchange, to prevent inflation spiralling out of control, and to minimise capital flight. Unfortunately, you can’t get from here to there without these factors. If someone can give me a plausible scenario that doesn’t involve capital controls, bank account conversions and so on, I’m all ears.

I outlined my seven-step Italian framework from November for Greece on Friday. This does not consider the bank solvency question, which is another separate issue:

  1. Plan. The Greek government can plan for a redenomination into New Drachma in secret that takes advantage of the Greek law jurisdiction over their sovereign debt obligations.
  2. Law. “Euroization” would remain in place and the euro would continue as the currency of physical payment. However, New Drachma would become the national currency.
  3. Taxes. The government would announce that henceforth it will tax exclusively in New Drachma. All municipal governments would be required by law to tax in New Drachma.
  4. Banks. The Greek government would (coercively) convert all euro bank accounts legally into New Drachma. The systems would process as if it were euros because of the fixed peg, but legally the money would be New Drachma. This would make the Greek economy “euroized” but make the banking system redenominated into New Drachma.
  5. Retail. Retailers, all sellers of Greek goods, would then be forced to return to the double accounting treatment of pre-2002 whereby they denominate all transactions in both Drachma and Euros. Paper money would be euros. The electronic money would legally be New Drachma, even while the systems said euro.
  6. Float. On day one, immediately after redominating, the Greek government would drop the New Drachma exchange rate peg and float.
  7. Physical currency. New Drachma would be printed by the Bank of Greece and introduced to replace euros.

Here’s why this proposal works: The forcible conversion of government bonds into New Drachma means at once that the government no longer has any default risk since all IOUs are in local currency which it could manufacture if necessary. The risk then becomes currency risk. As I wrote in Bond vigilantes and the currency relief valve:

So the currency gives way, not interest rates. And to the degree that interest rates would increase, the central bank can print. The currency revulsion question then is always currency depreciation, inflation and even hyperinflation (when and under what preconditions) not interest rate spikes.

The point then is to get the benefits of a floating currency but to mitigate inflation risks by instantly giving demand to the new Drachma by making all government taxes payable in Drachma. The New Drachma will be heavily depreciated and that will cause the price level to rise, which amounts to an instantaneous lowering of living standards. But if the currency can be stabilised then after this initial period, the devaluation doesn’t have to be inflationary. Iceland’s 2009 devaluation and capital controls is a guide here. In Argentina’s default, state coercion in the form of re-denominating non-Peso bank deposits helped. I remember being aghast at this theft at the time. But the reality is the state will want to drive out the use of all other media of exchange and so will be forced to do this with New Drachma as well. And forcing retail transactions into New Drachma entrenches the currency as a media of exchange. Clearly Marshall’s comments about getting better tax enforcement, by for instance taxing property instead of income, are key to making demand for New Drachma enough for the scheme to be successful.

To ensure some sort of viability of the drachma, the Greek government would have to find a more credible means of ensuring tax compliance. Most Greeks with money have presumably already moved it beyond the reach of the Greek banking system, so that savings would not be wiped out. As the tide of repossessions begins, many of these oligarchs would likely start to buy back the Greek assets on the cheap, as it is doubtful that the euro banks will want anything to do with them.

Beyond that, it would be important for Athens to establish a new tax system that minimises tax evasion, so as to create demand for the new drachma immediately, and mitigate the formation of an extensive parallel transactions currency. After all, it is possible that many Greeks might prefer to use the existing stock of euros in the country and there is very little the EU authorities could do to stop this (much as the US government could not prevent Panama from dollarising its economy). But in order to establish a long-lasting demand for drachmas, two things would have to happen:

  1. The Greek government would announce that it will begin taxing exclusively in the new currency.
  2. The Greek government would announce that it will make all payments in the new currency.

Given the country’s history of tax evasion on income tax, a national real estate tax would likely work better than a new income tax.

(See here for more details:)

Once all of these issues are taken care of, the demand for the currency should be sufficient and at that point all that would be left is to print the new currency.

The fact that Willem Buiter’s proposal at Citigroup is very similar to mine tells you that this is the kind of outline other euro watchers are going to come up with. His points on EU exit and capital flight are key. I agree with all of his points except the one on a currency peg. Greece is not competitive in a currency union with Germany and would suffer the problems with a peg.

Business Insider outlines Buiter this way:

  1. Grexit will only happen when Greece publicly flouts troika recommendations and has no chance of receiving aid.
  2. Greece will pass a currency law setting exchange rates and limiting those who can file suits against the Greek government in foreign courts.
  3. It will simultaneously impose strict capital controls to prevent capital flight.
  4. Greece could pursue a currency peg, but probably not for a few years.
  5. Greece might also decide to exit the European Union, but probably wouldn’t if it defaulted because the ECB wouldn’t give it money.A credit event would occur, provoking CDS payouts, though its timing could vary.
  6. The New Drachma would sharply devalue.
  7. The value of the euro would probably decline, probably by about 10%.
  8. While foreign banks and financial entities will take losses in the event of a Grexit, they will be manageable.
  9. Given Greece’s limited size, it’s likely to have little impact on trade, even to its closest trading partners.
  10. EU leaders would likely take strong action to prevent contagion.
  11. However, this support is not likely to be unconditional or unlimited.
  12. Regardless, there are lots of options left to maintain stability.

In conclusion, a Greek exit from the euro zone would be traumatic and the potential for serious policy errors exist. However, Greece’s fiscal path is not sustainable as part of a currency union dedicated to a strong currency and immediate fiscal balance, even with a haircut that takes government debt to GDP down to 120%. Moreover, even with Greece fulfilling the Maastricht criteria after a haircut down to 60% government debt to GDP that includes ECB (public sector) involvement, the lack of euro zone convergence means these problems will arise again. Greece is simply not competitive as part of a currency union with Germany – and it never will be. That means almost permanent fiscal transfers and a loss of Greek fiscal sovereignty. The political will necessary to support this solution does not exist. And so Greece will exit the euro zone. I have just outlined what I think is a good way for this exit to be executed.

This post is a special members-length weekly that I am making public because it is a continuation of the ideas for a Greek exit for the euro zone that I published on Friday.

This post originally appeared at Credit Writedowns and is posted with permission.

34 Responses to “How and Why Greece Will Leave the Eurozone”

donnaFebruary 13th, 2012 at 12:48 pm

i don't know exsactly what is the game with GREECE but the only sure is to go out from EUZ we desided ..not Europe…..and this will be snow analanche.. thank you

Jerry MelinnFebruary 13th, 2012 at 4:45 pm

As I see it your key point is that Greece is uncompetitive and this is the real problem. Greece has very little to export, I think the biggest export area here is unprocessed fruit and vegetables (no value add). The language prevents it from attracting FDI as well as legislation to control tradie unions, whose leaders call lightening strkes with impunity. No multi-national company is going to invest in Greece under these circumstances. I believe that many more politicians will 'jump ship' when the measures begin to be implemented and Greece will default, probably because the troika will refuse to hand over an installment of the loan when one of the conditions is not met. The article above is an excellent analysis

BozhidarFebruary 13th, 2012 at 4:47 pm

But if you think that peg to euro is not going to be good for their economy should it be floating or pegged to something else?

Jeff, ( OAP )February 13th, 2012 at 7:58 pm

Greece's biggest asset is tourisum, at the moment the prices in greece for the tourist are to high, so if greece, or should I say when greece, default and they are forced to leave the euro, which the population of greece never wanted in the first place, they then revert back to the Drachma, this will then have a positive effect on the greek economy as tourists will start to come back and spend there euro's.
this will then put greece into a better position inviting OAP's to purchase property at a more affordable price.
I will myself be the first to do this if they go back to there own currency

Jeff, ( OAP )February 13th, 2012 at 8:09 pm

Greece's biggest asset is tourisum, at the moment the prices in greece for the tourist are to high, so if greece, or should I say when greece, default and they are forced to leave the euro, which the population of greece never wanted in the first place, they then revert back to the Drachma, this will then have a positive effect on the greek economy as tourists will start to come back and spend there euro's.

CedricFebruary 13th, 2012 at 11:33 pm

At last we have a thoughtful piece on the subject – all we have from the politicians is "catastrophe" and "unimaginable".
I want to see more from this author, especially relating to the global implications.
Thank you.

AmericanInvestorFebruary 14th, 2012 at 12:49 am

The solution Edward Harrison proposes is an obvious one even to a non-economist like me. I proposed a similar course in a comment I made in the Financial Times about a week ago when several pundits were opining about how impossible it would be for Greece to exit the Euro. Harrison and Munchau are right that such an approach is inevitable and that delaying the inevitable is causing more pain to Greece than just getting on with it.

Patrice AymeFebruary 14th, 2012 at 3:10 am

None of this solves the fundamental problem of Greece which is a socialist policy in compensation for allowing plutocrats to pay no, or little tax.

Aegean1972February 14th, 2012 at 3:44 am

Going back to the drachma would be a disaster for 99% of Greeks. Keep in mind that right now the price of a gallon of gasoline in Athens costs about 10$ (with salaries being 50% less than those of N.Europe or the US). So you can get an idea of how hard it must be for them to just fill up their cars. If u turn them into the drachma and with a 60% devaluation of their new currency this means that basic imported commodities like petrol (medicine, wheat, etc) would be 60% more expensive to buy. If they cant afford petrol at 10$ a gallon, what makes u think they will afford it at 16$/gallon? It would be a disaster to turn them into the drachma.

Many foreigners would love Greece to go back to the drachma, so their luxurious vacations on the islands would cost them 70% less ( i would love it too). But turning a whole nation to "poor slaves" just because "in theory" they could be competitive with the drachma its not a socially acceptable argument. Its a theoritically-based “academic” scenario.

Aegean1972February 14th, 2012 at 3:54 am

As for Italy "not being Greece" thats the joke of the month. Italy is insolvent. Just give it 1-2 years and it will be a copy paste scenario of Greece. For the last ten years they had a 1% growth. Imagine whats gonna happen in the next 3 years when unemployment starts to hit the roof
.
Give them some time. The austerity measures have just started over there…

Europe knows that the only way out of this crisis is through either :

a) Kick out all the periphery (easier said than done) OR

b) Buy time (in the next decade) and through restructuring of the PIIGS economies (and over 2 trillion in haircuts) slowly go to fiscal unification in 2020. The question is if the markets will let them kick the can for that long. If Merkel wants to save Europe she’s gotta come out with a Eurobond in less than two years. Otherwise they might be in for a bumpy ride.

Greece’s exit might be “just a 3%” of the euro GDP. But that’s not the point. The political avalanche that it will trigger, will be much much bigger..

ibritterFebruary 14th, 2012 at 4:53 am

You have managed to think through the unthinkable. Well done. You show that not only does the emperor have no clothes, the he may get dressed again. When do you think the inevitable will happen?

Doug SFFebruary 14th, 2012 at 5:41 am

And the alternative is…. what? Greece has lived beyond its means for decades. It appears to have no economy, only public sector employees who don't work. The fact that gasoline will be more expensive is moot. If they lived within a realistic level of their domestic output, they couldn't afford $10. Time for a cold, wet slap from reality don't you think? They either have to get to work or get used to that academic scenario.

Aegean1972February 14th, 2012 at 5:48 am

Mr Harrison has some great ideas of how to get Greece out of the mess. Especially bringing prices way down in the tourist sector and attracting foreign investment in energy sectors, software companies etc.

I would love to hear more of his ideas but in a "within the euro" scenario. Although the drachma-scenario isnt as bad as we might have imagined.

If Merkel continuous with the economy-shrinking fiscal-domination scenario, i think Greece should really consider exiting the bureucratic and ideologue euro-club…
The armpit of the worlds economy.

With this brureucratic mentality, Europe will never become "United States".

Aegean1972February 14th, 2012 at 8:56 am

many countries have lived beyond their means for decades. The US being a prime example of that.
And public sector employees (internationally) arent the best examples for customer service or productivity.

So that is not a "Greek" problem. Its an international problem.

I totally agree with you that a cold wet slap of reality will start balancing things in Greece, but if you do that too fast too soon and with unbelievably hard taxes (like the troika has been doing for over 5 years now) the only thing you get is a really nasty depression and countries defaulting on their debts.

Greece and the whole euro-periphery needs structure and order, but also GROWTH.
Just hard-austerity (without growth) is a recipe for disaster. Half their medium sized businesses have closed down.

Curios GeorgeFebruary 14th, 2012 at 11:21 am

Pardon my ignorance but what about Argentina, they have returned to growth after default? And if I am not mistaken they recovered in a much shorter time frame than the current Greek recession / depression. What about Brazil changing to the Real, they seem to have recovered quite well, no? What is the difference with Greece? Why couldn't they return to growth?

llisa2u2February 14th, 2012 at 12:02 pm

PART ONE- this post is sorta long:

It is quite appropriate at this time that the "debate" is becoming more specific. You are very correct in your own remarks ,and appropriate in your remarks referring to Mr. Harrison and others. I don't mean to be some pedantic judge of others, even if my words probably suggest that type of attitude. Really I am trying to be as specific and appropriate in my own comments.

I have been following as much as possible, as only a "public reader", Economonitor and accompanying blogs for a while now. The issue of "academic scenarios" and I will also add that the issue of "academic debate" is intriguing. We all are debating and commenting from an academic perspective. Then from these words, each of us make conclusions and by our subsequent comments to others and continuing actions and non-actions we either change reality or we don't. Most of us don't. I am just as guilty as anyone else. What are we changing with our words, and debates?

I hope that I am not just writing and commenting similar to the writing and commenting that occurred before Rome’s collapse. However, I may very well be doing just that. How much real power do I have to change anything? Most of my life has been based on survival. There are window dressings of niceties, but as I review my life it is only survival in an artificial world. No easier than survival in the natural world. I sure wouldn’t last long even within the encampments provided by the differing worldwide NGO’s.

We are mere observers of a resulting predicament on others that have not affected us tremendously, YET.

The fact of any of us just being mere observers is neither good nor bad, it is just real. When the negative consequences of austerity measures ( which I do not think are the most appropriate words, however, I will use those words, since they are somewhat appropriate and trigger a mutual identification to the issues as referred to by Aegean 1972 and others) actually affect non-isolated population groups, then the reality of those austerity measures will no longer be possible to deny by any of us.

llisa2u2February 14th, 2012 at 12:07 pm

PART 2:

What kind of world do we want? Do we want population groups existing as incarcerated and basically enslaved population groups catering to whom, and what? Have you looked at any photos of employment quarantines of Foxconn for Apple etc.? Are these benign and accomodating living conditions with an enjoyable future for the inhabitants? Are these conducive of a reasonable family life for the inhabitants? Do I want to live like that? Do I want my children's future to be like that? It may be a profitable economic model for Apple, and certain other business corporations, for how long? And, what are the real costs, short term and long term, for whom and for what?

Also consider/toy with the present facts that McDonalds is considering the size of pens for pigs, especially since Chipottle has already been using large size pens for pigs (really just the sows) for a while now. Any interesting thought and writing digressions from those 2 sentences? Who and what is affecting, directing, and causing who and what to do anything?

On Project Syndicate, there have been articles (are the articles ghost-written by whom? GA’s or skilled PR assistants, perhaps the REAL credited authors, mostly academics, who else has the time to do any writing and thinking? Do even GA’s these days? Oh, I imagine a GA who is on scholarship, or perhaps independently wealthy and well connected socially, or politically, and doesn’t also have to work 2 jobs at $8 per hour USD, or support a family, or can even get a job, could ghost write for who-knows-who.) addressing the facts of "political economy". Political economy is an extremely important concept. There is a distinct difference between political economy, and economy. In the past , on many blogs, much of the focus has only been on "economy and economies" and the isolated activities of political/ trade/financial aspects of political economies. However, as more and more real people become focused on mere day-to-day aspects of survival, while consciously and unconsciously having to choose between assuming/adapting/functioning lifestyles that are radically changing but are basically subsistence lifestyles, all political economies are fracturing. Does it make any difference what the “regime type” is or isn’t? What is happening to the state of the “state” and the “law”? Whose state is still in control of whose state? Whose laws are in control of what state? Who is really in control of what, if anything?

llisa2u2February 14th, 2012 at 12:08 pm

PART 3: My thought digressions bring me to the point of asking can private entities that affect public infrastructure supercede any and all laws that affect others in separate states internationally? I think there is a limit. I don’t know if there really is a limit or not. The facts of globalization and corporate changes are extremely complex. Greece may be the predictor of what limits will be tolerated by real human beings. The real human beings that are fronted by private entities as investors (who may also have created, or may be impacted from varying degrees of the consequences of their own disguise) may or may not have exclusive most immmediate access to the demographic results and day-to-day experience to interpret statistical facts from the present melee of various political economies and effects of globalization by specific or significant international employers, and regimes. It does take much more time for facts of reality to be obtained and publicly accessible. In the past, there were significant time delays that caused the masses of people to not know just what was occurring for them as immediate consequences, caused by others. Today, because of the internet, information about what is occurring is available more immediately.

However, can any of us, as members of the general public, really change anything? Or are we mere observers of others plight? Can we only turn away, and comment, there but for the grace of God go I? It really makes me remember, J. D. Southers song, “Prisoner in Disguise”, and Frankl’s “Man’s Search for Meaning”.

What do austerity measures create for whom, where and what?

So, after all these words, all I can really consider is what’s the size of my cage, and who is my master? I still have food in my refrigerator, and there is gas in my car, both are paid for. Who knows how long I’ll be able to keep those things and continue to use them. I’m kind of glad that I am over 63, and am not glad at the issues I have to consider when I am 65, as a citizen of the US.

Right now, I get to play at being my own master, and get to take some time to write too! My words sure haven’t changed anything for anybody else. I’ve taken enough time to write about an issued that I am obviously concerned about, on one level or another. But my concern changes absolutely nothing.

But, I do have to focus on my physical health too. At least I do not want to self destruct yet.

SO, it is time to do aerobics, which is better than fighting with others any day!

SO, here's a "thought-full-high-jump"-Maybe today's international political leaders will remember to focus, address and debate just what the Olympic games are REALLY all about!
If not, then hopefully, the Greek citizens will.

Hopefully, All’s well that ends well!

And hopefully, these 3 posts aren't just interpreted as absurd!

Greekman888February 14th, 2012 at 12:10 pm

it's a myth that Greece has very little to export. Greece's main exports are fruit, vegetables, olive oil, textiles, steel, aluminum, cement, and various manufactured items such as clothing, foodstuffs, refined petroleum and petroleum-based products. Greece main export partners are Germany, Italy, United Kingdom, and United States. The key issue is the strangle hold the bloated public sector and unions have put on entrepreneurship and business in Greece.

diatoo1February 14th, 2012 at 12:16 pm

Greece in a very big mess, unavoidably, and independently of which way they try to go, internal depreciation (which would set Greece on fire) or exit from Euro (which will mean very big hardships for the people). The reason is that Greece has built up unsustainable structures over the last 12 years due to cheap credit and that Europe is not going to foot such bill permanently.

KirkBFebruary 14th, 2012 at 3:37 pm

So it is ok for shrewd investors to protect themselves.

Then would it not be shrewd for every small depositor to take his money out of Greek banks today? Clearly many have done this but the little guy should do this immediately.

And shouldn't every Greek borrow as much as possible from Greek banks and then keep it in cash and get a big payoff when conversion comes?

And if the little guy and medium guy does this doesn't it mean that the crisis goes critical immediately as all Greek banks collapse?

In our current "market system" people who work in regular jobs will never have the information that people in the financial industry have. Those with the information not only don't get hurt but they profit at the expense of those with less information. This sounds exactly like inside information and the evils associated with it.

So this straight forward plan with its element of secrecy will just be an enormous payoff for the well connected.

I think this is very unacceptable, so we need to admit the average Greek person is stupid and lazy and impose a tax on him and that financial people are brilliant and impose a negative tax on them. Then use the money collected from the little guy who works to pay the financial guy who doesn't work.
Oh wait that is what we do.

Please correct me if I am wrong.

Aegean1972February 15th, 2012 at 1:57 am

"The reality of those austerity measures will no longer be possible to deny by any of us". Very true. Couldnt agree more with you Lisa

What is happening in Greece right now, is a matter of time until it starts happening all over the world and especially to nations with high debts (euro-periphery and the US). Especially the US and Italy are ticking time bombs. Italy in less than two years will be insolvent and the US probably before 2017. Its just math.

Governments want their citizens to pay more taxes, more pension bills, more healthcare bills and instead of providing better services back to us, they actually want to cut their share of return with lower or non-existent pensions, more deductables in healthcare and more "out of the blue" taxes that eliminate our savings.

We need some major changes in the world, because its not the people's fault that got us into this mess. And its also not our fault that governments and politicians are incapable of doing pretty much anything.

We need change and healthy capitalism. The type of capitalism that "died" 100 years ago, when "bastardised capitalism" took over. And of course we could learn a few things from the Chinese (as far as growth).

shiv139February 15th, 2012 at 8:14 am

It seems logical that Greece will ultimately exit the Euro. But there is one chance for Greece to stay in EZ. If Greece implements reforms to its labor markets and publically available entitlements (pension, health, unemp ins, min wage etc), she will gain competitiveness. Austerity will crimp domestic demand and thus there will be capacity available to increase the size of export markets. Greece does export food and beverages, manufactured goods, petroleum products, chemicals and textiles. It also has a decent shipping industry. I suppose tourism is off while public riots! _If its biggest trade partners commit to incremental trade to offset domestic austerity, Greece could be saved. Germany, Italy, UK and US are all major export partners who could help and indeed gain if a more competitive Greece can provide additional products in a competitive market for exports – it seems crazy to expect austerity economies to increase imports, but Greece is a tiny economy – incremental trade flows of Euro 3 billion to Euro 4 billion to offset domestic austerity coupled with massive reform on labor and entitlements could see them through. My point is that domestic austerity coupled with reform must be offset with something for Greece to remain solvent. That something is unlikely to happen in todays confrontational world; but it could and it should.

HepionkeppiFebruary 24th, 2012 at 8:53 am

Simplest way for Greece to exit from EZ is just to start spending (and taxing) in new currency. Leavig the euroarea does not have to mean conversion of every monetary unit in the area to the new currency.

Government could just start spending in new currency – it could offer jobs where salaries are baid in new monetary units, and see if anyone takes them – and, this is crusial, accept the new currency in payment of taxes to the state.

So it would accept both euros and new currency in payment of taxes, maybe at bar value, and people could use which ever currency they would want to, and save in any currency they would want to, but crusially the new currency would always have some value because all those who have tax liabilities would be able to get rid of those liabilities and therefore, be willing to earn the new currency or exchange something for it, like euros if they have some.

So anyone holding the new currency and wanting to get euros instead could go to FX markets where those who want to aquire new currency to pay taxes if nothing else could meet those who wish to aquire euros. So it would always have some foreign exchange value. Hence, it would always have some value. It could not be worhtless currency.

HepionkeppiFebruary 24th, 2012 at 8:53 am

People could choose weather or not they would want to work in jobs that are offered in new currency or not, but given the astronomically high unemployment rates, I suspect any job opportunity would be quite wanted.

Slowly but surely new monetary unit could replace euro in use. Notice however one thing – no-one can pay taxes or save in the new currency unless government spends it into existance first.

So spending has to precede taxation. Government is the natural issuer of the currency. Operating in it's own, free floating currency it faces no funding constraint. It can "afford" to do fiscal stimulus, employ unemployed resources and buy anything that is for sale in the currency it issues.

That would be the real blessing of having you own currency, not the ability to devalue.

CalgacusFebruary 25th, 2012 at 8:18 pm

Hepionkeppi , the point of “coercive” conversion to drachma, Ed’s #4, is to limit savings in foreign currencies, essentially an import. So it’s an “import substitution” policy of replacing foreign stores of value with the domestic one, and so would help support the domestic, and thus foreign exchange value of the neodrachma. No comment as to the morality &/or urgency of this. Of course it is not absolutely integral to the Grexit.

And of course the Grexit is imperative, and highly beneficial and wouldn’t entail any more suffering than is felt currently, any more difficulty in obtaining needed imports – rather the opposite. And doubly of course, the idea that USA is in a similar fix is laughable, as are the ideas that austerity or shrinking government or crushing unions would be beneficial, rather than destructive to the Greek economy.

DannyFebruary 28th, 2012 at 5:06 am

Nice, well-thought article. Problem is, it's based on rationality and where is the discussion of nationalism?

Seems Greece (and Turkey) will view Greek exit as a gross, national failure. Turkey, having been shunned by the EZ, will be rightfully smug. That an obviously financially irresponsible country should be embraced while the hard working Turks are shunned will lead them to ask, "why are we fighting to join this bunch?"

I posit that Greece will accept the default decision, and that is to do nothing. It is politically easier to accept whatever is imposed on it from the outside, than to admit that they have failed (and the Turks succeeded by comparison) in managing their affairs.

LarryFebruary 29th, 2012 at 11:35 pm

Jerry your comment is already worn out.
Sorry but you are already wrong.
Next time try to think more before writing

Stephane GenilloudMay 14th, 2012 at 10:22 am

Greece is bankrupted and should be treated that way. Creditors must take their loss, and everybody should move on. It looks like a bonus for bad behavior, but economics have little to do with morality.
For the other south European countries, the situation is more interesting. They have one or several of the following troubles
- a mountain of debt
- insolvable banks
- trade balance deficit
- budget deficit
It looks unlikely that they can both avoid some debt-restructuring AND euro-exit. However, they do not necessarily need to undergo both. Ireland or Italy might well stay in the euro, while Spain might be able to avoid any kind of default.

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