With
the Greek psyche itself the victim of a relentless shaming campaign,
the idea of Greece “going it alone” begins to seem outlandish and
quixotic. It is not. But it is as much tied to a revival of spirit
and self-esteem as to the nuts and bolts of economic transformation.
by
Michael Nevradakis
Part
6 - Why leave?
The euro is
essentially a debt instrument: According to economist and former
central banker Spiros Lavdiotis, the European Central Bank does not
lend directly to its members—i.e. the member states of the
eurozone. It instead lends to the private sector, at interest. In
turn, the private sector lends to states who seek to borrow money, at
higher interest. This perpetuates the debt cycle, while the higher
interest is often financed in the form of budget cuts or higher
taxes.
Restoring
monetary sovereignty – external devaluation instead of internal
devaluation: What has taken place during the years of the economic
crisis in Greece is essentially a process of “internal
devaluation.” This means that the cost of labor in Greece—that
is, wages, insurance contributions and the like—have been slashed,
purportedly in an attempt to boost the country’s competitiveness.
Traditionally,
however, many countries have employed a different remedy for
responding to an economic downturn: external devaluation. Instead of
cutting wages and pensions at home, the value of the national
currency would be devalued, immediately making the country’s
exports, services, and labor cheaper and more competitive on a global
level, compared to other stronger currencies.
External
devaluation also helped foster much-vaunted foreign investment (as
the cost of investment would decrease) in economic sectors such as
tourism, as the country proceeding with an external devaluation would
automatically become cheaper for foreign visitors. With domestic
wages, pensions, and social services unaffected, quality of life was
largely not impacted by an external devaluation.
The main
disadvantage with external devaluation is that the cost of imports
rises. This, however, was traditionally offset in two ways: paying
for imports with foreign hard currency reserves (which can indeed
increase if foreign tourism and investment in the economy increases),
and by increasing domestic production, where possible, to alleviate
the need for imports. This promoted domestic industry and a policy of
full employment.
But today,
countries such as Greece are saddled with a hard currency that is
overvalued for the needs of the domestic economy, and where there is
no level of control on monetary policy. If this seems like a mere
unfortunate consequence of the euro, think again: Roger Mundell, the
Nobel Prize-winning economist and architect of the euro, foresaw
precisely this eventuality.
In Mundell’s
vision, as eurozone economies were squeezed with the first sign of an
economic downturn, all of the traditional monetary policy tools would
be unavailable in their policy-making toolkit. Unable to devalue the
currency or to increase deficit spending due to EU rules, governments
would be left with one choice: austerity. Cut wages, cut pensions,
slash social services to the bone. It’s a neoliberal wet dream—and
it is the European “dream” today.
Escaping
stifling EU fiscal rules: Currently, EU member-states must abide to
strict EU fiscal rules as part of its Stability and Growth Pact. The
main rules are that total government debt must not be more than 60
percent of GDP, and government deficits must not exceed 3 percent of
GDP.
At face
value, this sounds reasonable and prudent. However, the problem with
these rules is that they eliminate many of the traditional tools that
were available in the fiscal policy toolkit during times of economic
recession. Deficit spending, for instance, has enabled many
sputtering economies to get back on track, as cash re-enters the
economy, encouraging consumer and business spending and private
lending. Limiting this ability handicaps countries which are stuck in
a recession.
Indeed, one
of the primary ideas behind such rules is, quite cynically, to reduce
the political cost of what would otherwise be unpopular policies:
cuts to social services and pensions and the like.
It should be
noted here that leaving the eurozone or even the EU does not mean an
automatic green light to act recklessly. But it will afford a country
like Greece the freedom to take control of its fiscal and economic
policy. Notably, for Greece, the EU has determined that the
aforementioned strict rules do not go far enough. Greece’s current
“leftist” SYRIZA-led government, entirely subservient to Brussels
and Berlin, agreed earlier this year to achieve a primary budget
surplus of 3.5 percent annually each year through 2023, and primary
budget surpluses of 2 percent annually through 2060.
This
certainly contradicts Prime Minister Alexis Tsipras’ current
rhetoric regarding the official end of the crisis coming sometime in
2018. A primary budget surplus means that the state spends less than
it takes in. For a country with a stagnant or shrinking GDP such as
Greece, this means spending an ever-shrinking amount of money. And as
government revenues dry up, the surplus target is met by further
cutting spending, creating a perpetual austerity death spiral. As of
now, this is the economic future Greece faces, no matter what
Tsipras, the EU, or the media claim.
Increased
competitiveness on the global markets: Free of EU fiscal and monetary
shackles, Greece will be free to enact its own policy, including
future devaluations of its newly-restored domestic currency (more on
devaluation in part three of this series).
When a
country such as Greece is ready to take this step and devalue its
domestic currency, it will be able to better compete globally in its
three cornerstone economic sectors: tourism, agriculture, and
shipping. Greece will be a less expensive destination for foreign
tourists, while Greek agricultural products and Greek services will
be comparatively less expensive. And this will take place via a
process of external devaluation, rather than cutting domestic wages
and reducing the quality of life.
Greece has
an educated and multilingual workforce, as well as lots of untapped
or deprecated (due to EU) agricultural potential. Tourism, while
increasing in raw numbers, has a lot of potential for growth,
especially since average spending per visitor is far less than other
countries.
An increase
in foreign trade, exports, and tourism will, in turn, ensure that
Greece will maintain the necessary foreign hard currency reserves
with which it will import vital goods that it cannot produce
domestically. This is how the Greek economy operated prior to
entering the eurozone in 2002, and it is how even the poorest of
states are able to import oil, automobiles, medicine, or other
necessities.
Rolling
back austerity: Every sector of the Greek economy has been impacted
by the austerity measures that have been imposed by Greece’s
lenders in the troika since 2010.
Free of a
requirement to sustain a primary budget surplus, Greece would have
the ability to increase spending in vital social sectors such as
healthcare and education, to at least partially restore pensions and
salaries that have been repeatedly slashed, and to cut taxes, such as
the heating oil tax which has resulted in most Greek households not
being able to afford to heat their homes in the winter. Other cuts
could be applied to the value-added tax (VAT), which even for many
staple items is a hefty 24 percent, as well as high business taxes
that are choking the life out of Greece’s traditional economic base
of small businesses.
Even without
funding coming from the EU, the ability to increase spending could
also allow the state to jump-start infrastructure projects or to
continue existing public works. Measures could also be financed to
reverse the country’s “brain drain” and to attract some of the
600,000 Greeks who have emigrated, back to Greece.
Protecting
and promoting industry: Free of the requirements of participating in
the European common market, a country like Greece will be less
exposed to unequal or unfair competition from industrial powerhouses
such as Germany, which has flooded domestic markets with cheap
imports, while domestic industries have been shuttered or bought out.
Furthermore,
liberated from the requirement of enforcing production quotas under
such policy frameworks as the EU’s common agricultural policy,
Greece will be able to enact measures to return agricultural
production to its much higher pre-EU levels, thereby alleviating many
of the concerns regarding the country’s self-sufficiency and
“dependence” on Europe for its survival.
Think
people don’t want it? Think again: As was shown earlier, public
opinion poll results which claim that overwhelming majorities of
Greeks wish to remain in the eurozone and EU at all costs are likely
“fake news”—meant to influence public opinion and marginalize
opposition. What independent polls have indicated is that, at the
very least, a departure from the EU and, in particular, the eurozone
will not be nearly as unpopular as claimed—and may perhaps even
enjoy the support of a small majority.
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