Tuesday, July 07, 2015

Greek Options.

Now that they have voted no to the Troika's plan, what can Greeks do next ?

I see three possibilities.

First they can reach an agreement with the rest of the Eurogroup. I think this would be essentially equivalent to voting yes on the referendum. I don't see any reason why the other 18 in the Eurogroup will make significan concessions. Creditors have good reason to make an example of Greece. The governments of debtor countries have a much better reason to make an example of Greece -- otherwise they will lose the next election to the party most like Syriza (which in Spain is at least Podemos -- a party like Syriza -- while in Italy it is the moviment 5 stelle which is a bunch of angry people who shout a lot but don't have a program and who are responsible for the fact that Berlusconi can bring down the Renzi government and I hate ... sorry back to Greece).

I do not think this is an acceptable choice. The problem is that the rest of the Eurogroup refuses to accept Keynesian economics in spite of the overwhelming evidence. Their proposed solution to the Greek mess is not a solution at all. The problem isn't just that they are demanding even huger sacrifices from the Greeks. The problem is that their approach will not work on its own terms (see Austerity Arithmetic).

Second, they can stick with the 60 euro limit on ATM withdrawals until their banks run out of Euros. Notably this includes trying to stay healthy without pharmaceuticals.

This is clearly not an acceptable solution. It also seems likely that they will try.

Third they can reintroduce their own currency. They absolutely don't want to do this. I'm not sure why. The cost of introducing a lower status currency is that Greece would have to declare a banking holiday -- oh it has already done that.

Now if they don't like the word "drachma" they don't have to call it the new currency the drachma. I propose they introduce a new currency initially worth 50 Euro cents and call it the Deutsche Mark.

They certainly have the sovereign right to do this, and I think the threat might be useful.

9 comments:

Peter said...

They should put a picture of Merkel on the new Deutsche Mark.

Anonymous said...


"They should put a picture of Merkel on the new Deutsche Mark"

Yes , but with a contemporary photo , the devaluation could become extreme. Using a pic from her youth would be better:

https://twitter.com/oldpicsarchive/status/556409397426274304

Anonymous said...

People who think that a new currency will solve Greece's problems haven't thought things through. They face the same problems regardless. The Greek government needs tax revenue to function, seigniorage is peanuts. And don't talk to me about "devaluation", that is NOT POSSIBLE. Can't go back in time and create a drachma to devalue...

Robert said...

dear anonymous of 10:00 AM

The Greek primary budget (without interest payments) is close to balance. The Greek government has enough tax revenue to function. Their problem is that they owe 247 billion to other Euro block countries, the IMF and the ECB. If they don't meet scheduled interest and principal repayments, the ECB won't lend any more euros to Greek banks (or rather allow the Greek central bank to lend any more euros to Greek banks) so the Greek banking can't function. If Greece had a new currency, the Greek central bank could lend in that currency to Greek banks which would function.

This comment is an attempt to respond to your internally contradictory comment. You start by asserting that a new currency will not solve Greece's problems, proceed to argue that were it to be introduced a new would not solve Greece's problems, notice that it would solve the problems which Greece actually has (not the primary deficit which it no longer has) and then argue that a new currency is impossible.

Are you discussing the hypothetical consequences of a new Greek currency or aren't you ? You do so in the second and third sentence of your comment. Then in the third and fourth you assert that the question which you just addressed is irrelevant, because the hypothesis that Greece uses a currency other than the euro is and must remain counterfactual.

One of Greece's problems is 25% unemployment. This is not a necessary consequence of unpayable public debt, a budget deficit or, really anything. Greek debt might force Greeks to consume little and work hard but it shouldn't force them to not work. It seems likely to me that the unemployment problem will be solved through devaluation as it was for Argentina and Iceland (which had the mother of all banking crises and a debt to the rest of the world greater than Greeces and has 3.5% unemployment).

Note my use of the future indicative -- I predict that this will happen and I hate to make predictions (must qualify by "solved" I do not mean reasonable unemployment but do mean much lower than 25%).

Also typing in word in all capital letters does not make an invalid argument valid. When you find yourself doing so, you should ask yourself if you are trying to make up with bluster for ignorance (about the Greek budget) and an inability to consider more than one economic issue at a time.

Anonymous said...

Robert, I'm saying that anything that Greece can do with a new currency, it can do with the euro. The only fundamental difference (there are certainly cosmetic differences, which may have real effects in a complicated indirect way) is that with a new currency, Greece gets a little seigniorage. The concept of devaluation is inapplicable, since it assumes that Greece is already using as unit of account the drachma. You need a time machine for that.

Horacio Schreyer said...

Maybe they should get out of the € to deal their problems by themselves. In terms of further depreciation of the real exchange rate, things would work, of course at the cost of lower real wages, specially of public sector related. However I think that they have other "microeconomic" troubles (market structures and such) that will be harder to address than Argentina's, back in 2002. Improving international terms of trade played a key role for recovery.
But they'll have the problem of hard currency private debt, for which they could introduce some asymmetry when dealing with local banking loans & deposits or just capital taxation. That needs more than a few days to elaborate and I don't think they'll get much assistance from the EU for that kind of legislation.
Perhaps asking for a 1/1.5%p.a. rate on the debt, below actual's about 2.5% is feasible while sticking to the €, but of course I cannot give that for granted. Nevertheless, now I think by Tsipras' speach this very morning that they are more leaned to exit the €.

Robert said...

Anonymous. Now I understand what you meant by "impossible". In fact I partly agree. Greek workers will not be tricked into accepting Euro paycuts by printing "drachma" on paychecks. Greeks will think in Euros for years (I remember it going the other way -- I laughed at Italians for thinking in Lire in 2001 until one pointed out that I was thinking in dollars years after immigrating).

But Greece can declare that, in contracts, where it is written x Euros, courts must read 2x DM (or whatever they choose to call their new currency).
Workers can and will strike for the current exchange rate Euro equivalent, but creditors (including private creditors of private Greek debtors) would have no recourse.

Needless to say, this includes Greece paying the bonds on which it claims it didn't default in the new currency (to everyone and if they don't like it they can sue in Greek courts).

If it is a price tag it can be rewritten daily using the exchange rate. If it is a contract, it can't be rewritten, and a redefinition of the terms may be outrageous expropriation, but it is possible.

The huge DM inflation will cause increased DM tax receipts and, if Greece declares its debt to be redenominated in the new currency, a huge decline in the debt burden even if all revenues from sovereignty were, say, sent to the ECB. The new currency is a way to default also on debt to private sector creditors (including Greeks) without admitting it.

Notably, in Argentina there were domestic to domestic debts we denominated in dollars. Changing contracts ex post is a thing which one isn't supposed to do, but it can be and has been done.

Actually finally, I think there is some money illusion like effects of a new and not credible currency. I recall a notable Euro nominal rigidity (at the official exchange rate Roman subway tickets went from 1000 lire to 0.52 euros. The 2 cents were a hassle. This lasted a while. Now they are 1.50 and there is no need for pennies.

Robert said...

I'm being silly. The declaration that there is a new currency would solve one of Greece's problems -- that the banks can't operate. The Bank of Greece will be able to lend the whatevers to banks. This means that people can use their bank accounts for electronic payments. They won't be able to take the DM (dumbmarks) out of ATMs until paper DM are printed, but a whole lot of commerce, which is now suspended, will be possible again.

This is a brand new problem which the Greeks wouldn't have if they had voted yes. But they voted no and a currency of their own will solve the electronic part of it.

Anonymous said...

Robert, Greeks can make electronic bank payments now (inside Greece only). The banks are, to that extent, still working.