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27 September 2011
Greece needs to default on its debt and exit the eurozone
Guardian.co.uk - The demands of the EU, European Central Bank (ECB), IMF troika and the political climate in the northern parts of the eurozone have sent a clear message to the Greek people and the government of George Papandreou: "Do as we say, regardless of the consequences for you – or even for us." The demands go well beyond those prescribed by conventional economics. They will deepen the depression and make full debt repayment even less likely than it now is. Therefore, the clear, strong nudge is for Greece to default as soon as practicable.
Given the future prospects of following the current path, Greeks should welcome this opportunity. The trick, of course, is for the Greek government to develop within a short period of time the capability to default to the maximum benefit of the people it supposedly represents.
Preparing for default involves the formation of a large number of expert teams to defend Greek interests with conviction. For the debt that is based on Greek law, Greece has the upper hand. Negotiations for other debt will be more difficult and protracted.
Since Greek banks will become insolvent, they will have to be nationalised and preparations will need to be made for that. The insurance and pension funds will need to be bailed out, too. For both banks and funds to be bailed out, the country will need its own currency. Therefore, exit from the eurozone would follow.
Eurozone exit has been a taboo topic, especially in Greece. Whenever the taboo is broken, discussion is dominated by propaganda and scaremongering, often by employees of banks that stand to lose from such an eventuality. Let us review some of the relevant issues.
First, for the countries of the eurozone it has become apparent that there are only two clear options: political integration or breakup. Anything else is politically or economically unsustainable. Since there is no appetite for political integration, exit from the eurozone can be expected later anyway, when it could be even less advantageous for Greece.
Second, there is little doubt among economists that the easiest mechanism for a country to gain competitiveness is to have its currency depreciate. Hence, Greece having its own currency is the easiest path to gaining international competitiveness. Cars and iPhones will become more expensive but food might actually become cheaper and employment will pick up within a few months after the introduction of the new drachma. By contrast, unemployment and deprivation with no end in sight are the predictable results of following the troika's policies.
Third, without its own currency the country cannot even hope to have a semblance of democracy and national sovereignty in the future. Recent experiences attest to that. The alternative is to become a 19th-century protectorate of northern Europe, which exports its young and abandons its old and infirm.
The main problem with an exit from the eurozone is the transition period. Capital controls will have to be imposed. Temporary measures to ration foreign exchange for the importation of petroleum and other essential items will have to be undertaken. How will the Bank of Greece settle with the ECB? How will debt be converted from euros to drachmas?
It is clear that a tremendous amount of preparatory work is needed both for default and for exit from the eurozone, and much of it has to be undertaken in utter secrecy. Still, it has to be done – even if one were to disagree with exit from the eurozone. The reason is that such preparations would also enhance Greece's bargaining position with the troika. Instead of laughing at empty threats of renegotiation, as has occurred twice with the current finance minister, the troika would see that the government means business.
If the current Greek government can't or doesn't want to take such necessary measures that will preserve the country and its people, it should yield the field – with or without elections – to other political forces that are willing to do so. Greek students at a protest march in Athens against economic austerity and planned education reforms. Photograph: Yannis Behrakis/Reuters
The demands of the EU, European Central Bank (ECB), IMF troika and the political climate in the northern parts of the eurozone have sent a clear message to the Greek people and the government of George Papandreou: "Do as we say, regardless of the consequences for you – or even for us." The demands go well beyond those prescribed by conventional economics. They will deepen the depression and make full debt repayment even less likely than it now is. Therefore, the clear, strong nudge is for Greece to default as soon as practicable.
Given the future prospects of following the current path, Greeks should welcome this opportunity. The trick, of course, is for the Greek government to develop within a short period of time the capability to default to the maximum benefit of the people it supposedly represents.
Preparing for default involves the formation of a large number of expert teams to defend Greek interests with conviction. For the debt that is based on Greek law, Greece has the upper hand. Negotiations for other debt will be more difficult and protracted.
Since Greek banks will become insolvent, they will have to be nationalised and preparations will need to be made for that. The insurance and pension funds will need to be bailed out, too. For both banks and funds to be bailed out, the country will need its own currency. Therefore, exit from the eurozone would follow.
Eurozone exit has been a taboo topic, especially in Greece. Whenever the taboo is broken, discussion is dominated by propaganda and scaremongering, often by employees of banks that stand to lose from such an eventuality. Let us review some of the relevant issues.
First, for the countries of the eurozone it has become apparent that there are only two clear options: political integration or breakup. Anything else is politically or economically unsustainable. Since there is no appetite for political integration, exit from the eurozone can be expected later anyway, when it could be even less advantageous for Greece.
Second, there is little doubt among economists that the easiest mechanism for a country to gain competitiveness is to have its currency depreciate. Hence, Greece having its own currency is the easiest path to gaining international competitiveness. Cars and iPhones will become more expensive but food might actually become cheaper and employment will pick up within a few months after the introduction of the new drachma. By contrast, unemployment and deprivation with no end in sight are the predictable results of following the troika's policies.
Third, without its own currency the country cannot even hope to have a semblance of democracy and national sovereignty in the future. Recent experiences attest to that. The alternative is to become a 19th-century protectorate of northern Europe, which exports its young and abandons its old and infirm.
The main problem with an exit from the eurozone is the transition period. Capital controls will have to be imposed. Temporary measures to ration foreign exchange for the importation of petroleum and other essential items will have to be undertaken. How will the Bank of Greece settle with the ECB? How will debt be converted from euros to drachmas?
It is clear that a tremendous amount of preparatory work is needed both for default and for exit from the eurozone, and much of it has to be undertaken in utter secrecy. Still, it has to be done – even if one were to disagree with exit from the eurozone. The reason is that such preparations would also enhance Greece's bargaining position with the troika. Instead of laughing at empty threats of renegotiation, as has occurred twice with the current finance minister, the troika would see that the government means business.
If the current Greek government can't or doesn't want to take such necessary measures that will preserve the country and its people, it should yield the field – with or without elections – to other political forces that are willing to do so.
Author: Stergios Skaperdas
