Euro exit will not be enough for Greece

An editorial article in BloombergView (July 15, 2015) – Leaving Euro Is Better Than Eternal Greek Crisis – argued, with providing evidence, that “it would be better for Europe’s economic policy makers to spend their time figuring out how to manage an orderly Greek exit than continuing to negotiate deal after sure-to-fail deal to keep Greece in the euro”. Regular readers will know that I support an orderly breakup of the entire monetary union and if that is not possible then individual nations should exit on their own accord and reestablish some sane proportion in their macroeconomic policy settings. But exit is not a sufficient condition for restoring prosperity to a nation. They would also have to simultaneously abandon the neo-liberal Groupthink that holds the Eurozone economy in a vice-like grip of austerity. Under those provisos, the Greek economy would return to growth immediately and they could eliminate unemployment within a few quarters.

The latest data from Eurostat (July 14, 2015) – Industrial production down by 0.4% in euro area – tells an ugly story.

Industrial production fell by 6.9 per cent in Ireland in May 2015 (third consecutive month), by 5.1 per cent in Greece, by 2.1 per cent in Latvia, by 5.7 per cent in the Netherlands (third consecutive month), and by 0.8 per cent in Finland (falls in 5 of the last 6 months and zero growth in the remaining month).

Since the Euro was introduced, industrial production in Greece has slumped by 32.9 per cent, Spain 19.1 per cent, France 10.9 per cent, Italy 19.2 per cent, Cyprus 22 per cent, Malta 4 per cent, Portugal 15.6 per cent, and several nations such as Finland, the Netherlands have not expanded their industrial production at all.

The industrial base of some of Europe’s biggest economies has shrunk significantly and alarmingly in the peripheral Eurozone nations.

In the case of the Netherlands industrial production levels have fallen to those at the worst part of the GFC. The situation in Finland is worse than that.

In nations such as Greece and Spain, for example, youth unemployment has been at elevated levels since 2009, which meanst that in many cases significant numbers of young people will be entering the above 24 years cohort having never had a job. They will never has the chance to develop specific productivity skills or work experience.

The evidence suggests that they will take this disadvantage into their adult lives and cycle in and out of unemployment with some periods of low wage employment in between. They will never enjoy the advantages of previous generations which gained from the full employment policies that existed in the pre-neo-liberal era.

I cannot find a single piece of evidence that wouldd support the claims that the Eurozone had been a success. Even the price stability claims that the central bank continually makes are dubious given they are fighting the very real prospect of deflation and collapsing nominal asset prices (to follow on from the massive real estate losses that have already been endured).

I read an article today – The Effects of a Euro Exit on Growth, Employment, and Wages – published as Working Paper No. 840 (July 2015) from the Levy Economics Institute in the US. It was written by two Italians, an academic and a doctoral student.

It purports to make a case that a nation can prosper while remaining within the Eurozone and that an exit might be disastrous.

It opens with the statement:

A technical analysis shows that the doomsayers who support the euro at all costs and those who naively theorize that a single currency is the root of all evil are both wrong.

The technical analysis is low-tech to say the least.

But its overall observation that “If the economic policies of austerity imposed by the treaties stay in place, it is only a matter of time before another eurozone crisis occurs” is, in my view correct.

One doesn’t need ‘technical analysis’ of any great sophistication to conclude that. The monetary union was set up to fail even though the blind neo-liberal ideologues claimed virtue for the curious design they imposed on the people of Europe.

So irrespective of the exit issue, the Eurozone has to change and abandon its austerity bias if it is to survive.

As I argued in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – the scale of the changes required to put the Eurozone onto a path to sustained prosperity would appear to be beyond the capacity of the political classes to implement.

They are so blinded by the neo-liberal Groupthink that they reject evidence that indicates they are overseeing a disaster and promote arguments that have no basis in reality and just make the situation worse.

The bailout proposal (if we are calling it that) presented to the Greek government at the weekend is irrational even if one evaluates it from the point of view of those who have no particular care for the Greek people but just want their money back.

This will just be another interregnum before the next (and larger) Greek crisis hits. And while we wait for that to happen, the material standard of living of the Greek people themselves plunges further.

Sure enough, the Greeks enjoy per capita incomes greater than Romania or Bulgaria. But since when are satisfied in using rockbottom as the benchmark measuring stick for whether a people have legitimate grievances or not?

The Levy article then attempts to evaluate “what the consequences of an exit from the euro might be”. They recognise that it is difficult to be definitive because it all depends on how the exit is achieved – group, orderly, agreed, single country, etc.

In considering an abandonment of the euro and a restoration of currency sovereignty, there would be a difference between what we might term an orderly, planned dismantling of the currency union while reinforcing the political union through the European Parliament, on the one hand; and a disorderly exit by one or a few nations (for example, Greece or Italy), on the other hand.

The obvious solution for one nation is not necessarily the best solution for all. I argued in my book that an orderly exit would be in the best interests of all nations even though there would be significant costs involved in making the adjustment back to full currency sovereignty.

But, given the political situation in Europe, it is more likely that a single nation would have to make a disorderly exit to get free of the euro.

Further, I believe the exit by a single nation would have relatively minor consequences for the remaining nations but enhance the prospects for recovery of the exiting country, notwithstanding rather massive adjustment costs. However, the larger the current malaise, the lower would be the relative costs of exit.

Greece is at the point where the costs of adjustment will certainly be below the cumulative costs of on-going austerity.

The Levy paper chooses to highlight the exchange rate effects that would accompany an exit. It says:

… the foundations of economic theory teach us that a country leaving the euro and returning to its original currency, with an initial one-to-one exchange rate, will immediately encounter a loss of value for the re-instituted currency, which will then become cheaper than the other currencies. This should favor the country’s exports and restrict its imports, improving the commercial balance, driving growth and promoting employment.

But economic theory does not handle the case of a nation returning to its original currency which is no longer in circulation. It analyses situations where a nation breaks a fixed exchange rate arrangement or a peg or abandons a currency board.

But the situation of a nation inventing a new currency is not the same as these other more common happenings.

In that sense, it is less clear that the path of the new currency is certain – that is, a substantial depreciation.

A currency’s value is determined by supply and demand in the foreign exchange markets, which, in turn, reflect trade flows (exports promote a demand for a currency while imports necessitate supply) and financial flows (inflows promote demand while outflow lead to a supply of the currency).

From day 1, the new currency would be in short supply especially as the national government enforces all tax obligations to be paid in that currency.

It would not currently exist in central bank reserves around the world nor in non-government portfolios.

So the conventional case of a currency that is already circulating fully in international foreign exchange markets etc coming off a peg and then floating only to see it sold off does not apply to a newly introduced currency in, initial, short supply.

This raises questions for the Levy authors’ analytical technique, which is to examine what happened to various nations that abandoned “previous exchange systems”.

For example, they adduce evidence from Australia’s float in 1985 after that nation tried to stay on a peg against the US dollar long after the Bretton Woods system broke down in August 1971.

The Australian dollar was an already strongly traded currency at the time the peg was abandoned and our external deficit was already substantial – around 6 per cent of GDP in December 1985 – meaning there was already a downward pressure on the exchange rate any way.

The Levy authors thus bias the analysis immediately by including in their sample:

… currency crises that in recent history have entailed large devaluations of the exchange rate and that were accompanied by the
abandoning of previous agreements or exchange systems.

They claim they want to stay “firmly within the field of scientific approaches” to avoid “the pitfalls associated with the opposing ideological extremes” but set the technical analysis up in a way that assumes, say Greece, would experience a currency crisis from day one involving a “large” devaluation.

But lets play along a bit to see what their argument is.

They essentially examine what happened in 28 nations which were in this category (“large devaluations – over 25% against the dollar – which involved abandoning previous exchange systems”) after the float.

They focus on the effects on competitiveness, economic growth, employment and real wages.

They conclude:

1. Large devaluations “trigger inflationary processes” which “can annul the positive effects of devaluation”. But in high income nations (such as those in the Eurozone) this impact is rather mild and the nations retained more than 50 per cent of the gain in international competitiveness as a result of the depreciation.

2. The experience of higher income nations is heteregenous – some had no inflationary impulse, while other larger effects.

3. For higher income nations, “the commercial balance improves considerably” (competitiveness) after the depreciation and in most cases immediately.

4. This gain in competitiveness, stimulated economic growth in most of the higher income nations.

5. They found that despite the rise in international competitiveness and economic growth, employment growth was not as strong. The decline in unemployment in the higher income nations was small and reflected “a more intense use of labor and industrial capital”.

6. In the higher income nations, the major negative effect is on real wages as a result of the higher import prices. This helps them explain the sluggish employment growth response – domestic demand tends to support labour intensive sectors and if real wages are not growing strongly then spending will be subdued.

7. They then conclude that a “euro exit is not a cure-all” even though “abandoning the eurozone” would “trigger renewed growth”.

8. They consider the best outcomes occur “where wages were somehow protected from inflation, the domestic demand might not lose much impetus and this could sustain growth and employment”. Where growth relies on exports along, the domestic sector will fall behind and employment growth will be weak.

All of which is reasonable enough.

The point I make in my book is that European politics and policy making is caught in two very powerful and destructive vices at present.

The first is the age-old Franco-German rivalry. A corollary to this rivalry is a disdain for the ‘Latinos’ who by geographic proximity cannot be ignored, much to the angst of those further north.

The second is the domination of free market economics, the Groupthink, which though empirically deficient and riddled with internal theoretical inconsistencies, still rules the academy and through its graduates, the policy making sphere.

How the economics profession has been able to convince the rest of us that by ‘counting angels on a pinhead’ and then not being able to correctly sum the angels they claim to see (their so-called ‘economic models’), they have anything to say about enhancing societal wellbeing, is a study in itself and constitutes one of the biggest frauds of the 20th century and beyond.

All the evidence from psychology and behavioural studies tell us that the mainstream economic assumptions about human motivation and decision making are devoid of reality.

I agree that exit is not sufficient for nations in the Eurozone.

The rise of Monetarism, which originated out of the academy in the US, created a ‘post national’ tension among the politicians, which cut across the old state based rivalry between the nations in Europe.

Whereas the early discussions about union placed the national state at the forefront, by the time Delors and his Committee met, the global capture by the financial elites of the policy process was well entrenched and the promotion of Monetarist economic ideology aided their agenda.

Recall that Delors excluded the national finance ministers from his panel to ensure that the Monetarist perspective would emerge quickly and not become derailed by national political hankering.

It was imperative that the supranational entities, which were created as part of the union, were consistent with this post national ideology.

That is why the fiscal role of the state was so restricted and the primacy of the depoliticised ECB elevated. The old national rivalries have persisted but their expression has become increasingly channelled by the free market narrative, which created the monster that is the EMU.

Neither of these vices will release their destructive grip on European affairs easily. The cultural and historical aspects of the Franco-German rivalry are permanent constraints on European progress. It is true that this ‘enmity’ evolved in the post World War II period.

The diplomacy is less chauvinistic and the prospect of another major European war is minimal. Some have even considered the relationship between the two great European nations to be one of ‘amitié franco-allemande’. But despite the handshakes at official meetings and smiles for the cameras, there is always a simmering clash of culture and the memory of World War II is still strong.

While the rivalry was intense and open under President de Gaulle, which held back European integration, later the rivalry was expressed from the French side as a desire to neutralise German power, and the only way to do that was to create a European state where France dominated.

From the German side, whether anyone wants to talk about it or not, a deep and silent shame gripped the nation as a result of its actions during the 1930s and 1940s.

The only source of national pride became Germany’s economic acumen, its technical and organisational skills and the discipline of its workers. The stereotype of the ‘clever German’ arose to replace that of the ‘ugly German’.

European integration became a way the German nation could win back some respect by demonstrating that it could be part of a peaceful Europe. Reunification accelerated that desire but accentuated the paranoia in the rest of Europe about the ‘German question’.

This rivalry and divergent ambitions and motivations dominated the path to monetary union over many decades. When finally Mitterand and Schmidt seemed to be working together, the motivations and cultural baggage remained as disparate as they had been when Monnet and Schuman first proposed the ‘European Project’.

These differences suggest that both of the large European nations would be better off pursuing their own economic destinies.

But they can only do that if they also free themselves from the vice-like grip of neo-liberal economics. The dominance of free market thinking has so perverted the European Project, that the failure of the economic plan is now endangering the beneficial political and legal aspects that have accompanied the formation of the European Union.

The true value of the European Project is in its capacity to deliver a rule of law throughout Europe and engender multilateral co-operation on matters such as immigration, climate change, human trafficking and global concerns that single nations cannot solve alone. Abandoning the euro would not undermine that sort of cooperation.

Conclusion

Greece, for example, would be destroyed if it exited and retained the neo-liberal austerity bias in its domestic policy.

It would have to not only exit and follow the known guidelines for introducing their new currency but also abandon the fiscal rules that they endured as members of the Eurozone.

They would have to abandon the focus on the fiscal outcome and instead see it as a response to movements in the real economy.

Whether the Levy analysis is applicable is highly questionable. I think their sample is not particularly relevant to a nation introducing a new currency from scratch.

I also think there would be very strong reasons for the rest of the Eurozone to ensure the new currency doesn’t crash given that I would advise the exiting government to redenominate all official liabilities in their new currency – a power that the accepted principle of Lex Monetae bestows on sovereign governments.

But even if there was real wage effects – and the reality is that a nation’s real wage measured against import purchasing capacity depends on the movements in import prices – the government could assist by introducing a national Job Guarantee to ensure that anyone who wanted to work could earn a respectable minimum wage and add to public production and community well-being.

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    32 Responses to Euro exit will not be enough for Greece

    1. Bill, You claim that if Greece exits the EZ there’s a danger of it retaining “neoliberal austerity”. To judge by the relatively high inflation in Greece between 1970 and 1990, it could be argued that the danger is they go in opposite direction, i.e. print and spend too many Drachmas. On the other hand they had inflation well under control in the 1960s and in the 1990s prior to their joining the EZ. So it’s hard to say which way it would go.

      See http://www.inflation.eu/inflation-rates/greece/historic-inflation/cpi-inflation-greece.aspx

    2. NeilT says:

      German and French enmity began a lonnnnng time before the end of world war two. The French, after WW1, were still smarting from paying war reparations to the Germans after the German-Franco war of the mid 19th Century hence the disastrous Versailles treaty. I imagine one could go even further back…the struggle for power in Europe has a long history, can’t see it ending!

    3. Neil Wilson says:

      I’ve been saying this for several months now.

      The current value of the Greece Drachma is infinite – because you can’t get hold of any no matter how many US dollars you have.

      So these characters are saying that the value will go from infinite to 50% of the value of the Euro in US dollar terms based purely on correlation with previous episodes.

      Never has the phrase ‘correlation is not causation’ been more relevant. They have absolutely no mechanism by which this can come about other than colossally bad management by the central bank and government introducing the currency.

      I’ve noticed that mainstream economists make two critical errors when analysing finance. In the government bond market they assume there is no market maker and purchaser of last resort when there usually is one (There is always a bid by the UK GEMMs for Gilts for example), and in the foreign exchange market they assume there is a market maker when there usually isn’t.

      Ultimately FX traders have to get the currency and deliver it to the other party within two days no matter what FX games they play.

      And as the Greek debacle has shown, if you control the liquidity you control the players.

    4. John Doyle says:

      Staying in the Euro currency zone while being picked apart daily via the austerity program will have a devastating effect on the country. It will come to be regarded as an unworthy member and the greeks will be ever more humiliated. This will spiral further down until the stereotype gets as low as it can. By which time the greeks themselves will have lost much dignity, and it will show.
      Look what happens to the Roma or the aborigines or other first peoples. They live a marginalised existence and are forever put down.
      Greece has to take steps to stop this slide. The economy is secondary. The belief in themselves has primacy.
      Leave now!

    5. dnm says:

      @Neil

      The value of a new currency will depend on the balance between supply and demand. If, as Bill says, it will initially be hard to get hold of, there there will be little motivation to use it for everyday transactions. Some other currency or pseudocurrency will have fiscal hegemony. So demand will be low. In Bill’s model, taxes will drive demand, but this seems to be the classic example of an economist assuming the existence of a tin-opener. The recent history of Greek tax compliance is not encouraging.
      If on the other hand, all Greek Euros were converted at a stroke to Drachmae, then both supply and demand would be increased, but we would be in a situation in which devaluation followed, for the usual reasons.

    6. Fiona says:

      “the prospect of another major European war is minimal”

      I am not at all sure about that

      http://thosebigwords.forumcommunity.net/?t=45693594&p=407810936

    7. Jason H says:

      Can anyone shed some light on the affect on a currency of the large trade deficit of Greece. I understand it’s something like 80% imports and 20% exports. Does this change anything or is it still a matter of limited drachmas?

      Also an issue I can see happening in Greece due to the low collection of taxes is that the euro continues to be a main currency for an extended period after the currency is introduced. If the black economy expands then this could cause major issues. Wouldn’t countries like Vietnam or Cambodia be better comparisons in that case? Cambodia largely uses USD rather than local currency and Vietnam you can’t exchange dong once you leave? Or there may be other better countries to compare? I can almost foresee in MMT requiring something like a military campaign for Greece after introducing drachma to ensure thorough tax collection or at least perceived to be enough to ensure taxes are paid. I wonder if the lack of tax collection was one of Varoufakis’ main fears of changing back to drachma?

      Bill, we almost need a crowd funding campaign to buy your book and ensure that European leaders read it! Sadly I think it’s going to take things getting a lot worse in Europe before there is dramatic political change. It’s amazing how groupthink appears to have taken over the german people yet again in regard to Greek people being the lazy people taking Germany’s money. They are becoming the enemy of the german people is the impression I’m getting from german people from Paul Krugmans blog. Including people commenting from Germany. It’s scary and has dangerous links to recent history of previous wars and the mass groupthink of the german nation.

    8. /L says:

      @Jason H
      http://www.tradingeconomics.com/greece/current-account-to-gdp
      There is data from 1980 and one can compare wit e.g. Balance of Trade that have data from 2001.
      I don’t know how it affect but Greece have a special situation as the world largest shipping nation, large sums flow out for ship building/buying and then the this huge real capital stock is parked in flag of convenience countries.

      The worlds Cumulative current account balance 1980–2008
      https://en.wikipedia.org/wiki/Balance_of_trade#/media/File:Cumulative_Current_Account_Balance.png
      https://en.wikipedia.org/wiki/Balance_of_trade#/media/File:Cumulative_Current_Account_Balance_per_capita.png

    9. /L says:

      Another thing I briefly read some year ago claimed that Greece shipping industry right before GFC did sale and lease back deals with German banks. Then with GFC the plug was out of global shipping, one remember enormous fleets of merchant ships parked outside Singapore and Shanghai. Supposedly it was the German banks that got Black Peter (the card game).
      Then very little is heard about or from Greece shipping industry one could maybe assume that health keep quiet.
      Nothing I really know, maybe it was just internet noise.

    10. Bob says:

      You have to introduce a war economy.
      This is why you introduce strong taxation on the wealthy in Greece. Ban bank lending for anything other than Minsky-style capital development. A scarce currency will go *up* in value.
      The external sector is competitive – export led nations will save in the currency and those who have a more helpful central bank will buy drachmas. Otherwise we will talk to the Chinese, etc.
      And ban imports of luxury goods and introduce rationing to make sure the imports are only what is *needed* comes in.
      Greece can feed itself.
      The British government maintained rationing throughout total war in World War II and afterwards until the early 1950s. There was full employment.
      The Greeks have to fix the tax system (tax property via land value taxes if you can’t collect others properly) and implement rationing but it can be done.
      Because if the left doesn’t do it, the fascists will.

    11. CharlesJ says:

      JasonH,
      “I wonder if the lack of tax collection was one of Varoufakis’ main fears of changing back to drachma?”

      According to the BBC article below, the idea that Greece is especially bad at collecting taxes is overplayed.

      They managed to collect tax to the tune of 34% GDP in 2010, compared to the UK’s 35.5%GDP.

      http://www.bbc.co.uk/news/magazine-33479946

      Kind Regards

    12. larry says:

      dnm, It is only the rich in Greece who paid no taxes – Varoufakis has contended that they have been tax immune. The average person, as in most countries, generally paid most of the taxes they owed.

    13. Hoffa says:

      If existing Greek government debt and bank deposits where to be dominated in Drachma then I would believe that there existed Drachma for the private/foreign sector to sell. Would not also the Government be forced to redominate government debt and deposits to Drachma?

    14. larry says:

      Bob, there is no need to ban luxury goods. The Greeks can do something along the lines of what the US did many years ago and introduce an excise tax that is so high that the rich will hopefully be lead to think twice before buying such items. But should they decide to buy them, and the tax loopholes removed, which they must be anyway, the government obtains substantial tax revenue.

    15. Bob says:

      “the government obtains substantial tax revenue.”
      So what? The rich have plenty of money and as MMT shows us taxes do not fund spending.

    16. larry says:

      Yes, but Greece is not at this point an independent monopoly currency issuer. While the rich Greeks do have plenty of money, they have also been endemic tax avoiders. This practice has led to execrable inequities in the Greek economy and must be addressed. And this would have to be addressed whether the Greeks leave the Eurozone or not. The issue of the relation between taxes and spending is irrelevant in this context.

    17. Bob says:

      “While the rich Greeks do have plenty of money, they have also been endemic tax avoiders. This practice has led to execrable inequities in the Greek economy and must be addressed. ”
      Completely agree.
      I was talking about *after* Grexit.
      “this would have to be addressed whether the Greeks leave the Eurozone or not. The issue of the relation between taxes and spending is irrelevant in this context.”
      It can’t be addressed in the eurozone because the Troitka will not allow it and is forcing regressive changes in tax and spending.

    18. Zoltan Jorovic says:

      Interesting that Neil Wilson suggests “The current value of the Greece Drachma is infinite – because you can’t get hold of any no matter how many US dollars you have. ” Well, I have several hundred drachmas, and would be happy to supply them to him in return for a very reasonable quantity of dollars.

    19. “……. and as MMT shows us taxes do not fund spending.”

      That’s only true of sovereign currency issuing countries in monetary, but not real, terms. Greece isn’t sovereign.

    20. Bob says:

      “Greece isn’t sovereign.”
      I know. I was talking about Grexit!
      “monetary, but not real, terms. ”
      Well yeah, taxes free up “room” for govt to buy real resources but £1 collected from rich man will free up less “space” due to prosperity to consume than poor but most wealthy people will just spend from their savings. Savings function as voluntary tax. If they buy luxury imports their savings may go down a bit due to tax but there is still downwards pressure on exchange rates.
      Zoltan, he’s talking about the new currency. I doubt old drachma will be accepted. Let’s say they call it “cheeseburgers silos.” Do you have any cheeseburger silos?

    21. James says:

      I don’t think that “the powers that shouldn’t be” care about prosperity. There is an overarching game plan, which is the disintegration of sovereignty and the privatization of counries into the hands of international financial-corporate interests (the so-called 1%). That the populations are driven into penury is irrelevant. Reduction of population, lowering of life expectancy, demand reduction–these are all part of the overarching aim, as are the militarization of domestic police forces and ongoing global warfare. Neoliberalism–or, if you prefer, the Anglo-Zionist empire–is a plan for world hegemony, and it now encompasses the entire Western world; the politicians are all bought and paid for. Only Russia and China refuse to be vassals. A major war in the near future is certain.

    22. James says:

      “The nation state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.”

      Brzezinski, Zbigniew, Between Two Ages: America’s Role in the Technetronic Era (New York: Viking Press, 1973), p. 246.

      “People, governments and economies of all nations must serve the needs of multinational banks and corporations.”

      “The technotronic era involves the gradual appearance of a more controlled society. Such a society would be dominated by an elite, unrestrained by traditional values. Soon it will be possible to assert almost continuous surveillance over every citizen and maintain up-to-date complete files containing even the most personal information about the citizen. These files will be subject to instantaneous retrieval by the authorities. ”

      “This regionalization is in keeping with the Tri-Lateral Plan which calls for a gradual convergence of East and West, ultimately leading toward the goal of one world government. National sovereignty is no longer a viable concept.”

    23. Bob says:

      “A major war in the near future is certain.”
      Nothing is certain.

    24. Hacky The Hufrex says:

      One tactic for a Greek government would be to look at how it could possibly make things worse via Grexit and simply avoid that. The Greek government doesn’t need to map the entire territory of opportunities. It only needs to map the most difficult territory and take a path around that.

      The real economic issue during transition is avoiding destruction of real capital, e.g. structural, social and human. The issue isn’t the price of the drachma, it’s the material social relations that comprise foreign trade. Supply chains would need to be maintained therefore some debts would have to remain, especially in the private sector. In theory this causes a scarcity of foreign currency, however in the Greek context it’s not clear whether this scarcity exists. There may be enough hoarding of Euros to maintain structural and social capital of trade relations during a transition period.

      Debts to the Euro group are irrelevant because they aren’t trade debts and a default to the Euro group doesn’t destroy any Greek real capital. It may trigger a domino collapse of Euro membership but that doesn’t destroy Greek capacity. That would be destruction of German real capital, i.e. ending the domination of export markets. As the current agreement increases the likelihood of Grexit, this may coincide with a Chinese Minsky moment creating an oversupply crisis in Germany.

      In the medium term there is no trade problem for Greece because Greece can easily increase its domestic market and manage its external trade. It’s impossible to overstate how easy it is for Greece to build its domestic market.

      Tax collection requires the legitimacy of the state which is effectively the legitimacy of violence. Legitimacy of the state should therefore be democratic mandate.

      Economic decisions are therefore not the only important decisions for the Greek government. We’ve seen some of Yanis’s graphs and they don’t appear to map Grexit from the right. Every engineer has a tale of missing a node or an edge and the catastrophic consequences that occur when this happens. This is why it’s important to simplify and verify as much as possible. Ignoring the possibility of Grexit from the right may have been a catastrophic error.

      On a less important tangent. Yanis’s graphs have been ridiculed by mainstream economists for being too simple. No doubt they would also ridicule the decision structures that control nuclear power stations as well. These clowns don’t understand that graph traversal is non polynomial.

    25. John Doyle says:

      Here’s a blog looking at a somewhat brighter side for Greece;

      https://medium.com/bull-market/greece-time-to-look-on-the-bright-side-55d86bca9536

    26. Some Guy says:

      Jason H: Merijn Knibbe’s The 10% of GDP Greek *surplus* on its services trade balance is well worth reading – together with Frances Coppola’s comment there, it is a fine precis.

      Note:It [surplus of almost 10% of GDP on its ‘international trade in services’ account] is caused by the fact that Greece is not only home to one world-class economic sector (tourism) but even to two (the other being shipping), which is a lot for a country the size of Greece. Does this mean that Greek services are hyper competitive, as opposed to a supposedly petrified German service sector? When it comes to tourism and shipping: of course.

      But fearmongers ignore this, focus on 80/20 or whatever goods import/export. Many usually progressive / reliable sources are bad & biased on Greece. Like billyblog, RWER, Knibbe in particular, is an exception.

    27. Kevin Harding says:

      Surely current bank accounts will have to be re denominated in Drachma.
      Even with a shared currency the ECB have failed its most basic role of guaranteeing
      money transfers if there was a Grexit then Greek banks would be bankrupt in euros.
      It is never useful to bring imaginary concepts like “the infinite” into economics.This
      is a common failure of the limits of growth debates postulating imaginary infinite growth
      models .
      It is reasonable to predict that on Grexit there would be serious import inflation.I would
      agree with the commentator that in the short term a war type economy would be the best
      policy.Even I agree that increased government sector employment would have to be directly
      targeted at the unemployed and that labour would have to be directed at the production
      of vital resources (food ,medicines etc) .

    28. Jason H says:

      Thanks for all the links I’ve read through them all. Interesting stuff especially the shipping surplus. The positive Greece article is a breath of fresh air but if there’s any more political issues I can’t see confidence fairies doing much for Greece and add in the increasing surpluses it doesn’t bode well in my opinion.

      Reading about switchover to drachma in the electronic world the one thing that stick out for me was that Greece should treat the switchover to drachma as the Euro being the new currency. Change all euro liabilities to be drachma at 1:1 conversion and life should carry on. In the case of the euro then any teething problems would be on that side instead so seems like a smart idea. The only concern I have is if that 1:1 ratio makes using euros the de facto currency for too long. How long would be the aim to get rid of cash sales in euros? They may need some tough enforcement on domestic sales needing to be all done in drachmas. I really hope Greece can get through this and have smart people advising them. It would be a great case of MMT proof of concept in a much better fashion than the Chicago boys test case of Chile. If it could be successful it might change the world dramatically.

    29. John says:

      “A major war in the near future is certain.”
      Nothing is certain.

      Lots of things are certain, including your eventual demise, but your remark destroys itself; if nothing is certain neither is your affirmation.

    30. Bob says:

      OK, the vast majority of things are not certain. Happy now? If what you are saying is certain I need some proof.
      War is dome by finance now – Euros instead of bullets.

    31. Peter Smith says:

      Hang on a moment Bill,

      It has taken me a few days to get this clear in mind. Someone is trying to pull the wool over our eyes!
      I have read plenty of articles that claim that the Greek economy was coming right towards the end of last year and it was only the actions of Yanis Varoufakis & Alexis Tsipras that reversed this trend.

      So what is the real truth? I am inclined to believe that your analysis of the situation is closer to the truth. But do you see the bigger problem? How on earth is the average Greek (and the average European for that matter) able to make sense of this constant, contradictory information that they are fed. Not everyone has the time, patience & skills to sift through the internet to find out what is really going on.

      Clearly, it is also a battle for “hearts & minds” and the anti-Euro, anti-EU and anti-austerity lobby are going to have to get their ducks in a row if they wish to influence public opinion enough for the pendulum to start swinging the other way.

    32. c says:

      gentlemen,
      as far as I know there are already plenty of wars going on (even tiny little Belgium is throwing bombs in the middle east, paid for in € or $)

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