If you do want to make a “Social Democratic” case for Greece staying in the Euro, I think you need to put more emphasis on the Syriza case – that is , the first thing to do is try and renegotiate the “Bail Out” and “Austerity” : At the moment the “Bail Out” doesn’t go to Greeks, the Euros just get fed into the Greek and other creditor banks. The Greek people get austerity, which is both squeezing them and leading the economy into stagnation. Instead, their should be an attempt to renegotiate the deal, away form austerity, towards investing in the Greek economy (rather than just paying off the banks) – which would be a rejection of the Merkel plan.

A solution for Greece inside the Euro or outside the Euro, in either case means some level of rejection of the Merkel stance, I think.

First we have got to recognise that the crisis is not a Greek/Spanish/Portugeeese etc etc one, but a German one, carefully constructed there for their benefit. As long as Germany continues to run a current account surplus, the problem will continue. If you are in a trading relationship with a surplus country (or area within a country) there are, basically, only two thing that can be done: readjust the currency rate (by a mix of the surplus country going up and others going down: it doesn’t matter which) or money transfers to the deficit countries.

Any transfers must be real. Not loans—loans provide a short term fix, but actually in the long run make things worse.

The Euro started with a fantasy that all countries would adjust to make them more like Germany. This has not happened, and Germany continues with its economic tweaking to ensure its status as a surplus country.

Keynes argued at Bretton Woods that current account surpluses were just as economically bad for a trading area as defecits, but was over-ruled by the USA.

The Euro as it is currently constituted is economic lunacy, and cannot stand. Even if the politicians patch up the current crisis, al that will happen is that it will rec-occur some time in the future.

What is needed is an orderly dismantling of the Euro. I agree that the exit of Greece etc at the moment would cause short-term economic problems, but am unconvinced that these would be other than short-term. Look at Argentina. Broke it’s link with the dollar, defaulted. Chaos predicted, but less than five years on the country was well on the road to recovery, and borrowing money at reasonable rates.

So, what to do? Germany, not Greece etc, should leave the Euro. Perhaps with Holland, Denmark, Luxembourg and perhaps some others forming a North European fiscal group. This currency would float up against the residual Euro and take the pressure off. At some later point, this could be split into a Central group lead by France, and a Southern group lead by Italy and Spain. A nice, orderly wind-down.

Will it happen? I don’t think so. The EU is a Vanguard oprganisation which is institutionally incapable of contemplating retreat from any position. Batten down the hatches and wait for a disorderly collapse, which might threaten the integrity of the EU itself. They might stave it off this time, but it will happen.

Such a scheme looks like an invitation to fraud – a bit like the ‘carousel fraud’ that takes advantage of cross-border VAT rules. It would mean a euro would be worth more outside Greece than inside – if you think the “idea of proper capital controls is frankly fanciful” with a new currency, imagine what it would be like in the same currency. Anyone who could would try to move their money outside Greece, purchase goods there, and move the goods back in. And then openly export them, and pick up the subsidy.

It’s impossible to know by how much, but a cut of 75% purchasing power is certainly not out of the question.

I kind of think it is. 40-50% seems more likely. Bringing Greece in line with their actual productivity.

,i>In an internationalized economy like Greece, there is no such thing as ‘out of the euro’.

Of course there is.

Most rich Greeks able to do so will already have stored their wealth elsewhere and the capital flight will continue to happen. The idea of proper capital controls is frankly fanciful.

It is also probably illegal in EU law. But the deed has been done and most of the money has gone. So the devaluation does not matter now does it? The goal must be to bring that investment back home.

As holders of still-valid euros, or other ‘hard’ currencies, they will then be in position to purchase both the assets and labour of the mass majority of increasingly desperate Greeks at rock-bottom rates.

I am sure that is true. So?

A dual economy will swiftly emerge, as in pretty well all countries without their own hard currencies.

Surely by definition a dual economy requires a weak currency surely? One with a hard currency does not need the weak one.

as will the emergence of black market currency trading, where the New Drachma is even less valuable than at the official exchange rate.

Only if they are so stupid to impose currency controls. But if they have a 75% devaluation that implies they have no currency controls.

This might be exacerbated by the government seeking (understandably) to gather its tax revenues in hard currencies, although for the long-term it is better off using taxes collected in New Drachma as a way of stabilising and promoting its use within the wider economy.

If they collect their taxes in Euros, Euros are the official currency. That is the definition of a currency isn’t it? If the government doesn’t want it, who would?

Fortunately, the signs are that the hard-left party Syrzia have decent economists, who realise what the official exit from the Eurozone would mean for their constituents. While they are firm in their commitment to ending self-defeating austerity, they have already stated that they want Greece to remain in the Eurozone.

Decent economists? They are going to steal German and French money and expect to stay in the Euro? Good luck with that. They want to end austerity but they run a budget deficit? How are they going to do that?

The Greeks show an utter lack of connection with the real world. Syrzia is a bunch of hard line former Communists. How can they have any rational people much less good economists? If they were good they would not be Communists.

One alternative already exists, of course. This, as our very own union economist Duncan Weldon has set out, is through “artificial devaluation”:

By imposing a duty on imports and equal subsidy to exports a country can, in effect, devalue its currency without leaving the Eurozone. A, say, 15% surcharge on imports and a 15% subsidy to exports in Greece would be effectively a 15% devaluation in the currency.

This assumes imports and exports are equal. Notice it also pushes up the cost of everything by 15%. So why not just devalue by the same amount? Notice that 15% is not remotely enough – Greece should be about the same level as Bulgaria which means a 40% devaluation at least.

Needless to say, it is also illegal. The EU is a free trade area remember?

Call me a hoary old social democrat washout, but I know which I prefer.

Good for you. But you won’t get it. Because this scheme does not have a passing resemblance to reality.

but a cut of 75% purchasing power is certainly not out of the question.

Err, yes, that’s the point of a devaluation. It promotes import substitution you see?

A majority of Greeks are apparently against leaving the euro, but also against austerity. The only way to accommodate that is for on-going transfers of money from the northern euro states (mainly Germany) to Greece and the other southern euro states. This would be in the same way as happens in other single currency areas especially large ones.

But, but, the Germans don’t want to give more money to the Greeks so that’s that. The choice is therefore somewhat limited for the Greeks. If they keep the euro then it’s austerity forever. Their productivity and output is what, 50% less than Germany? So the best they can expect with the euro is a standard of living 50% less than Germany.

If they leave the euro, devalue and default, they’ll have a bad time for a few years. However, they’ll be more competitive and this will instill growth. Of course no-one will lend them any money any time soon and their government will have to live within its means, but isn’t that the aim of austerity?

Damned if they do; damned if they don’t. Whatever happens it’s going to be messy. The domino effect is the big thing we should be worrying about.

I wonder what have been happening if Greece had not joined the EU, and was never in the Euro? Would they have had IMF bail outs and no austerity?

1. Solomon Hughes

Instead, their should be an attempt to renegotiate the deal, away form austerity, towards investing in the Greek economy (rather than just paying off the banks) – which would be a rejection of the Merkel plan.

So you think the Greeks should steal all that German money and then demand the Germans give them still more – while all the time retiring at 50 and refusing to pay taxes? Well, good luck with that. Really, I hope it works out well.

Greece is running a current account deficit. Which means to pay for new spending alone, they need to borrow more money. So the minute they tell the Germans to get lost, the Germans will stop lending them money and then they will have to cut spending by about 6% – the difference between what they spend and what they raise in taxes. Who is going to give them the difference?

2. MarkAustin

If you are in a trading relationship with a surplus country (or area within a country) there are, basically, only two thing that can be done: readjust the currency rate (by a mix of the surplus country going up and others going down: it doesn’t matter which) or money transfers to the deficit countries.

Well that is not all the options. You can move large numbers of people from one region to another region – what America did with the South. You can also restructure the economy of one region – again what America did with the South.

The Euro as it is currently constituted is economic lunacy, and cannot stand. Even if the politicians patch up the current crisis, al that will happen is that it will rec-occur some time in the future.

Absolutely.

Look at Argentina. Broke it’s link with the dollar, defaulted. Chaos predicted, but less than five years on the country was well on the road to recovery, and borrowing money at reasonable rates.

Argentina is a primary producer in the middle of a primary products boom. No surprise they are doing sort of well. Although they are managing to destroy their whole economy again. Greece produces what?

So, what to do? Germany, not Greece etc, should leave the Euro. Perhaps with Holland, Denmark, Luxembourg and perhaps some others forming a North European fiscal group.

I believe that would be the best solution but as the Euro holds down the German currency and hence increases German exports, it isn’t going to happen. Perhaps the Latin countries can kick them all out?

“the Germans will stop lending them money and then they will have to cut spending by about 6% ”

The primary deficit (ie, excluding the interest on hte bonds they’re going to default on) is about 1%. Which is less than the cuts they’d have to make to stay in hte euro.

Greece really should default and leave the euro.

I can understand those on the left trying to think of ways to make things easier for Greece. Unfortunately, the simple truth is that there are no good options available to them. SMFS is correct to say that Greece is Bulgaria. It is only the artificiality of the euro that gives the illusion that their wealth is similar to the north.

” By imposing a duty on imports and equal subsidy to exports a country can, in effect, devalue its currency without leaving the Eurozone. A, say, 15% surcharge on imports and a 15% subsidy to exports in Greece would be effectively a 15% devaluation in the currency. ”

Is an interesting idea albeit one that breaks the rules of the single market. This is a state who are incapable of collecting their own taxes. Does anyone seriously believe that they could implement effective capital controls? Moreover, the problem with Greece is that they do not export very much to subsidise. They have a substantial current account deficit that is financed through the eurozone central bank target2 system. Some on the thread are confusing their current account deficit with their government fiscal deficit. They are quite different but both require the cooperation of the rest of Europe for financing. Sticking two fingers up at European institutions and other nations setting rules is really not an option when they are financing the difference between your imports and exports. Greece would be in an even worse position if they were shut out of the target system and the ECB stopped accepting their collateral.

Suspending the rules of the single market as Duncan suggests effectively ends the single market. One can’t have a sometimes single market. The same problem would arise as will happen when a member leaves the actual EZ. People in financial markets and general business will immediately focus on who is next and they will be hugely weakened. A temporary suspension one place means it could be suspended any place and faith in the single market would decline. The EU for good reasons would now rather see a member leave than suspend the rules. However, they did look the other way at not full member Iceland breaking the rules with capital controls.

The relatively small primary fiscal deficit that the government have achieved is a bit deceptive. That would quickly disappear with a EZ exit, which means when they do exit they will be dependent on the IMF for funding. If the far left want to stick it to the IMF, there is nowhere else to go as they are the end of the line. There is no getting away from the fact that the Greek standard of living is going to fall further. The real question is what is their best route to recovery. As long as they are members of the EZ they have no option other than to conform to the rules set by others. Exiting would be awful but at least allows them more control over their own destiny and a route back to some semblance of prosperity. The EZ will slowly strangle them.

As sensible commenters on the Duncan Weldon article pointed out, imposing tariffs on imports from the eu would be clearly illegal. As non-eu exporters to Greece could avoid tariffs by exporting via another eu member state (neighbouring Bulgaria would I’m sure be pleased at the boost to its economy) it would be a dead letter. Providing subsidies for exports to the eu would be clearly illegal also as there’s no realistic prospect of it being approved by the eu commission under the state aid rules.

Realistically the cure appears to be for Greece not to exit the eurozone but to exit the eu.

Suspension of the single market rules would provide the uk with a very strong reason to exit the eu as it would be very difficult to make even the minimal case of trading advantage for staying in. If Greece is allowed to exempt itself from these rules then why not the other troubled countries? If tariffs and subsidies are allowed to be more prejudicial to the uk and other eu states than those imposed by more important non-eu states what benefit is there to membership? Why wouldn’t the British left revert to its anti-eu stance to enable it to provide support for British jobs for British workers and subsidies to rebuild industry?

They might not like it but the Greeks are going to have to suck up the pain that is required to get them back from the years of the high life they have had as members of the euro and the eu.

It would help if Greece stopped buying armaments…..

However, Greece’s economy simply does not have the productive capacity to support the lifestyle that its citizens have come to expect, and that the Euro enabled them to have during the boom years because of foreign capital inflows. Those flows have now reversed, capital is leaving the country and there is zero political will for reinstating them in the form of fiscal transfers. Greece will inevitably decline back to where it would have been if it had never joined the Euro. The only question is whether it does so quickly, by exiting and accepting the consequences of sudden large devaluation, or slowly, by remaining in the Euro and accepting years of recession and austerity. Remaining in the Euro without austerity is not an option, whatever Syriza (and Duncan) may think.

“It would help if Greece stopped buying armaments”

Oh ffs – didn’t the bailout terms include a reduction in defence spending then?

I guess thats neo-liberalism in practice in a nutshell. Cut health, education and social services. But keep buying weapons (presumably from western arms companies). It’s clearly more important to have the ability to blow something up rather than have decent hospitals then……

Planeshift @13

I read somewhere that Greece spends twice as much as the UK on the military in terms of percentage of GDP – 5% versus 2.5%, was it?. More than that, they owe a small fortune to Germany and France for purchases of hardware including some very expensive submarines. I haven’t read that Germany and France is letting them off the purchase costs.

So submarines, yes, but paying pensions seems to be optional.

@ SMFS – tbh I think a Grexit is more likely in the long run, but I still think there is a fair chance that a Syriza led government will negotiate better terms : The Germans may well agree to what you call “stealing” some of their money for a less austerity -led package, in return for keeping Greece in the Euro (because the Germans would be worried about contagion causing Spain and Ireland to follow rather than so much about Greece itself)

If you think of the Greek EU “bailout” as similar to an IMF “bailout”, it is worth remembering that while the IMF always goes for a cuts, austerity package, there is also always negotiation about how much cuts and how much austerity, as in this recent LSE paper

http://www2.lse.ac.uk/newsAndMedia/news/archives/2012/01/IMF.aspx

Your suggestion is quite innovative, even if not legal under present eurozone rules – most of which have been broken anyway. It would certainly make a mockery of the single market though and that is the reason given for why we can’t leave isn’t it?

Perhaps Ed Milliband could increase his 14-point lead over the Tories by offering an in/out referendum right now. We really should leave this mess behind us and take back our country. So, Ed, how about it? I might even start voting Labour again!

“By imposing a duty on imports and equal subsidy to exports a country can, in effect, devalue its currency without leaving the Eurozone. A, say, 15% surcharge on imports and a 15% subsidy to exports in Greece would be effectively a 15% devaluation in the currency.”

So you plan to have a country take part in a free trade zone and impose import duties and export subventions? A truly strange idea. Others have pointed out that it is illegal. That is a minor issue compared to the internal controversy of the idea.

Face it: The Greeks are consuming more than they earn. That has to stop. Whether you call stopping it austerity, or something else, doesn’t matter. Nothing will make things better until Greece stops running a primary deficit. No trickery, left-wing or right-wing, will help.

Stop dreaming of import and export taxes and subsidies within EU. It won’t work. What Greece can do is start collecting taxes instead of evading them. They can do it in euros or they can do it in drachmas. VAT is a good place to start. Property taxes are also a good idea. Income taxes won’t help much, capital gains taxes help even less.

Stop trying tricks. They won’t work.

the emergence of black market currency trading

This will only happen if the greek government ban owning or trading in Euros, whixch would be a stupid thing for them to do.

By the way, a large part of Greek exports is, presumably, tourism. The country does not have much else.

How does one put a 15% tax on tourism? Not how does Germany do it, but how does Greece do it. You know, a country that cannot collect the tax owed to it.

I wasn’t around last night to respond to comment on this edited article (original at Though Cowards Flinch), but quickly……..

1) Of course what’s being suggested is currently illegal (full version probably makes that clearer). But then so was Germany’s refusal to be sanctioned for missing its fiscal targets under the Stability and Growth Pact in 2002ish. But if the lead countries of the EU were desperate enough (and they could be) there’d be a way round it, just as there was for Germany post-unification bill. That might even be an agreement for a temporary exit by Greece from the EU, while retaining the Euro. I accept that there’s a big WTO issue to be dealt with as well, but not insurmountable

2) SMFS @20. Yes of course there’s an issue with the ‘failed state’-ness of Greece when it comes to tax collection of whatever type. In the original piece I link to an MMT article (not because I agree but because it’s a useful analysis) which recommends a property tax as a blunt more effective (mamageable) istrument on the shorter term.

3) Tim Worstall: yes I know that import substitution is what devalution is about. I was pointing to the scale of it (75%), not the fact of it. If the soup kitchens can’t afford to buy the food etc etc etc….when you get over the temptation to cheap patronage based largely on the fact that (edited) blogposts can’t detail all assumptions about prior knowledge, you can be an useful commenter. Unfortunately, you don’t seem to want to.

4) Solomon @1 and @5: You make an important and valid point about the ability of SYRZIA actually to strike a deal that actually works (more probably a two stage one?). Those considerations are in the originial version, pre-edit by Sunny. I don’t think it’s at all out of the question that this might happen. SYRZIA seem quite sensible from what I can see.

In the highly unlikely event that the EU is willing to allow Greece to break free of the austerity policies forced on it without leaving the euro, great. Otherwise, Syriza, which is both anti-austerity and pro-euro, will have to choose (if it ends up leading a government or playing a decisive role in one) which of these two points is the more important. I think the first, given that the austerity Greece is suffering is much worse than what we’ve had here.

Of course what’s being suggested is currently illegal (full version probably makes that clearer). But then so was Germany’s refusal to be sanctioned for missing its fiscal targets under the Stability and Growth Pact in 2002ish

Yes but. One of those was an infringement of a technical rule. The other is a fundamental breach of one of the founding principles of the entire European Union. They really are of different magnitude.

“the temptation to cheap patronage”

Laqnguage, language….while patronise (condescend to) and patronage (be a customer or supporter of) are indeed spelt the same way only one of them become patronage. The other one.

21. Paul

That might even be an agreement for a temporary exit by Greece from the EU, while retaining the Euro.

Sorry but why would anyone want to do that? That would be the worst of both worlds. Greece could not devalue. It would still have to go through austerity. And it would no longer get CAP money or all the rest of possible EU subsidies while no longer having free access to the European market. The only sane policy is for Greece to remain part of the free trade zone but get back its own currency.

If the soup kitchens can’t afford to buy the food etc etc etc….

If Greece, a primarily agricultural nation, does not produce enough food on its own for soup kitchens, and it can’t, they have some serious problems. Although what is interesting is the way that the Greeks have adopted the liberalism of both the European left and the free marketeers – both of whom either dislike or don’t care for family obligations at all – and as such are seeing major family breakdown for the first time. In the past Greek families would have cared for their own. Now single Mothers are dumping their children. We have made Greece less like, well, Greece and more like us. The poor Greeks.

You make an important and valid point about the ability of SYRZIA actually to strike a deal that actually works (more probably a two stage one?). …. I don’t think it’s at all out of the question that this might happen. SYRZIA seem quite sensible from what I can see.

Again if they were sensible, they would not have spent most of their lives working for the victory of the Soviet Army in their own country. They would have noticed that Stalinism does not work. But what possible deal could they strike that will work? They want to steal the rest of the Germans’ money. Having already taken 75% of it or so. They want the Germans to continue to give them more money. They don’t want to work for it. How is it possible to square this circle? Greece needs to leave and then get its own house in order. Something that will be made all the harder because we have worked so hard to undermine the traditional structures of stable society in Greece. But they have no real alternative now.

Maybe we should be arguing that the Eurozone shouldn’t abandon Greece. Greece can stay in the Euro if other countries accept that austerity is a disaster.