How Not To Withdraw From The Euro-Zone

 

By Andrew Brons

greece-riots-14Greece, its people and its Government are a conundrum indeed. When the Syriza Government was elected, it was on a platform of fighting the austerity measures that were being imposed on the Greek people by the Euro-crats as a condition for further 'support' – if  'support' is not a misleading term in the circumstances. We might ask: support for whom or for what?

I would not want to demonise the Eurocrats to a greater degree than they deserve but their first priority was not and is not the welfare of the Greek people; it is the survival of the Euro-zone – intact. They know that if Greece were to withdraw or be expelled, in an orderly way, and it was seen to be for the benefit of the Greek people, other ailing countries would want to follow suit. Once withdrawal starts to take place, it becomes an option for all Euro-zone members and 'ever-closer union' becomes a failed objective.

 Whilst the first priority of the Eurocrats is to avoid Greece withdrawing, their second priority is that if withdrawal or expulsion should become inevitable, it must be as disorderly as possible! When the Eurcrats predicted riots on the streets of Athens as the inevitable consequence of Greece leaving the Euro-zone, they really meants that those riots would be the desirable consequence. That is not the same thing at all!

To be fair to Syriza, it was not elected on a platform of leaving the Euro-zone. It was elected on a platform of opposing austerity. Indeed, there is opinion poll evidence for a majority of the Greek electorate wishing to remain in the Euro-zone and not simply remain as members of the EU. What proportion of people make a distinction between Euro-zone membership and EU membership is a matter for conjecture.

However, leading members of Syriza must have realised the possibility of Euro-zone withdrawal being a consequence of their actions – unless of course they were assured on the quiet that it would not!

If Syriza members did realise that withdrawal was a likely consequence, why do they appear not to have been planning for it? Indeed, the only (former) member of the Syriza Government to have contemplated a partial withdrawal has been Yanis Varoufakis, the (former) Finance Minister. He mentioned the possibility of 'parallel liquidity' and California-style IOUs. When his comments were publicised following the referendum, he was transformed from Finance Minister to former Finance Minister. He has been replaced by Mr. Euclid Tsakalotos – no less left-wing but a vociferous opponent of Greek exit from the Euro-zone.

So, what are to make of all this? Are we simply seeing demonstrations of brinksmanship by both the Eurocrats and Syriza, united by wishing for Greece to remain where it is but differing about who will pay how much of the bill for it to remain?

If the Eurocrats really did care about the welfare of the Greek people, they would have been co-operating with Syriza on a Plan B for orderly withdrawal. It is clear that orderly withdrawal is not part of the Eurocrats' agenda.

It is possible, of course, that Syriza has been assured privately that withdrawal or expulsion will not be allowed but that the Euro-crats have already decided to make withdrawal inevitable. That would take Syriza by surprise and force it to arrange a  parallel currency in a hurry. What should have been planned for carefully will be done hurriedly and inexpertly. There will then be riots on the streets and the 'prediction' of President Schulz will become a reality. Then his 'prediction' of the replacement of Syriza by a government of technocrats will also become a reality.

This is not as fanciful as it might appear. We saw the EU fund disorder in Kiev that led to the unconstitutional removal of President Yanukovic of Ukraine in 2013 (?). Would the EU refrain simply because Greece is a member state?

 

Andrew Brons  –  9 July 2015

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6 Comments

  1. The classic response by sovereign states to levels of public indebtedness so high as to condemn future generations to debt slavery and to make the national government little more than a receivership committee acting on behalf of foreign creditors is to default, devalue and restructure.

    Some in our own circles would embrace such an approach with frivolous levity, but then many of them foolishly hailed an one-eyed twice bankrupt as their Messiah!

    For reasons that I explain below, I do not advocate national default so lightly as some do, but I acknowledge that for Greece it might be the least bad option, as it was for Argentina in 2001, the most recent example of a more or less successful default.

    In order to work, default would have to be combined with the reintroduction of the drachma as the national currency, just as Argentina abandoned the dollar peg and floated the peso.

    Under such circumstances, the new currency will fall sharply in value, restoring competitiveness without the need for wage cuts.

    Locally produced goods and services ought in theory to replace imports, which will become much more expensive, so increasing employment and tax revenues, while reducing the trade deficit.

    This process is however very painful for ordinary people without access to foreign currency, as imported goods and services of every kind soar in price in local currency. That is one reason why it is not to be adopted lightly.

    Default and devaluation would be even more painful for Greece than they were for Argentina, since Greece imports most of its food and fuel, whereas Argentina is a large exporter of food and substantially self-sufficient in fuel.

    What is more, while governments can print their own money freely, they cannot print foreign money. If they are locked out of international capital markets, they are driven to adopt a kind of semi-barter economy, which is primitive, cumbersome, and very vulnerable to fluctuations in commodity prices (usually denominated in dollars, never in drachmas!). That is another reason why it is not to be adopted lightly.

    For the present, the majority of the Greek people are still not willing to contemplate going back to the drachma, because they (rightly) fear that it will prove a poor store of value and will be subject to severe inflationary pressures, as an insolvent government resorts to printing more and more paper money to fund its core activities in a polity where widespread tax avoidance appears to be an endemic problem, and no-one will lend to the Greek state any longer.

    Until very recently, only the Greek Communist party has advocated return to the drachma (which goes some way to explain why the policy has not been popular with many Greeks). None of the traditional parties have been willing to consider leaving the Euro, but nor have Syriza or Golden Dawn, so just for once, the Communists have been right (if repulsive).

    It is now abundantly clear to most people that Syriza sold the Greek people a false prospectus when it pretended that Greece could stay in the Euro, while breaking all the rules of the single currency bloc and openly defying its creditors, an impossible trick for a country that has given up the right to issue its own currency.

    Despite that dawning realisation, the uncomfortable truth that only Grexit and a return to the drachma can offer any hope of economic revival is still not, it seems, the majority view. Until it is adopted, perpetual austerity and intergenerational debt slavery will be the order of the day.

  2. Varoufakis says that Schauble really does want Greece to leave the Euro and told him so. Others say the idea is to show any other potential defectors what a nightmare that would be to ‘encourage’ them. Boy this is a dirty game by careerists who’ve spent their whole lives on the insane project.

  3. ( Party Official ) Politicians, Civil Servants and People are united in this Country on being glad we are not in the Eurozone ! Our Nationalist British Democratic Party are in favour of Withdrawal from the European Union as we wish to be free from the tidal wave of Immigration , caused by ‘ unlimited free movement of people ‘ .

  4. ( Party Official ) A Country without its own Currency is well on the way to not being a Country , anymore !

  5. Devaluation reduces consumption because imports get dearer. But when you have mass unemployment it also permits far greater increases in consumption since output can be raised without an unsutainable trade deficit.

    There is a conflict of interest in Greece since those already in work lose in the short-run by devaluation and their concerns apparently still outweigh those of all the potential gainers who are not in work.

  6. One must take it as read . Andrew Brons knows the name of the game . He after all spent 5 years dealing with these people. And I’m sure he is right, in that a nod is as good as a wink to a blind man . As is the Syriza Government . Trots to a man . And The EU Commisars do not want a left wing party hung out to dry . Had the Greeks voted Golden Dawn . The outcome would have been totally different.

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