It's Wednesday, and as usual I scout around various issues that I have been thinking…
IT considerations of a Greek exit – Part 2
This is a short update to today’s blog. I had a discussion today with a good friend who owns a significant private firm in Europe which is at the forefront of delivering innovative card payment services to banks and corporations throughout the Eurozone. He is an expert in IT solutions, has one of the best understandings of the technical structure of the financial system and the computer systems that support it. That is how he makes his living. He offered the following short additions to my blog. His knowledge is impeccable and his insights valuable.
He provided three excellent insights concerning the Naked Capitalism article.
First, while a Grexit is surely a major undertaking what the Naked Capitalism author clearly fails to mention (and probably doesn’t know) is that the Euro was integrated ‘on-top’ of the existing legacy IT payment systems.
So for instance the payment gateways still support the Greek Drachma (GRD) as a currency. So ‘switching’ the Drachma back on would not be such a major task. The same is true for major acquirers and banks.
Second, my friend suggests that the Grexit should be accomplished by stealth. He would leave everything in place as it is for now. Then establish, in secret, a public bank (like the German KfW), procure the banking software out-of-the-box, sign a contract with a major card-scheme to use its network for transactions and hook the bank up with the official Bank of Greece, the nation’s central bank.
Once ready the Greek government would announce that any legal entity in Greece has a Drachma account at this bank. Everybody would then receive their Online Banking credentials and Drachma Maestro/Vpay debit card in the following week.
Then the government would look for vital services and/or taxes to define where Drachma payment would be mandatory. Ideal targets include public transport and perhaps a Fee for foreign exchange transaction to facilitate imports.
Third, my friend suggests that the Greek government would be advised not to issue cash. That is, to make the new Drachma a digital currency only.
The reason for this is that Greeks are notorious at evading taxes, a fact that has been well documented. He reports that Greece is the country with the lowest rate of cashless transactions in the European Union.
It is not stretching the truth to suggest it is already very much a cash society. Therefore given that he suggests that the best way to enforce tax compliance is to monitor it gently via digital transactions only.
Those comments come from someone who is dealing in these matters with very large transactions on a daily basis.
Once again, I conclude that an exit would not be rocket science and the IT issues are fairly trivial. So why is Naked Capitalism supported those who clearly haven’t the first-hand knowledge and are using literature to make their case which is old (1999) and written to cover a different situation entirely?
It’s the usual line.
If they don’t think they can do it, then they should get out of the way and leave it to somebody who can.
I’ve spoken to a few people about it. All of us reckon it’s easily doable in a number of configurations depending upon how the politics needs to flow to make it work politically.
You always get Fear Uncertainty and Doubt spread by those that don’t want positive change that disturbs their comfortable status quo.
And of course once people nail their colours to a mast in a blog, they find it almost impossible to say that they got it wrong and that actually its probably doable in a way that is good enough to get things moving in a positive direction again.
You don’t need it to be perfect. You just need it to be good enough to do what needs to be done.
The technical issues (legal, administrative, IT and so on) of Greece leaving the Euro are not difficult. They are quite do-able as a number of papers have shown like Roger Bootles’ paper, “Leaving the Euro – A Practical Guide”. As Bill points out, history and a number of recent real world exercises also show that monetary unions and breakups are easily technically achievable. What is lacking currently in Greece is political will and social vision.
Anything that humans have built can be dismantled, replaced, rebuilt and/or improved upon. This holds true while knowledge and technological know-how are maintained or still improving.
The reason for this is that Greeks are notorious at evading taxes, a fact that has been well documented. He reports that Greece is the country with the lowest rate of cashless transactions in the European Union.
honestly can’t blame them. if fiscal policy is strangulatory the black market has to function as a stabilizer of last resort, even if it does not do a very good job at that. black market labor does contribute to real economic growth. not all of it is just drug sales.
Get rid of the cause (austerity) and tax evasion, as a symptom, should diminish.
Broad measures to combat tax evasion, in symptom only, may even unequally affect those short of the means to lobby and arrange tax loopholes for themselves.
Issuing cash is extremely important for two reasons: firstly issuing it would be very profitable for the government, and secondly, failing to do so wouldn’t stop people using cash: they’d use Euros and Greece would end up like Argentina only worse.
The above criticism assumes a Grexit. If instead Greece stays in the Eurozone but issues Drachma as a LETS to alleviate the worst effects of austerity, I don’t know what would happen.
I’ve read attentively both Bill’s pieces of today, Proyect’s piece in “Naked Capitalism”, and the comments in the latter.
At a certain point someone (clearly a sycophant) posted the link to Bill’s first article of today as Bill’s “reply” (afterwards he pasted a part of Bill’s Part 2, as “er, a new salvo”).
I was already intellectually driven to agree wholeheartedly with Bill.
But what really irked me was Yves Smith’s herself last derogatory comments, not Proyect’s article, somehow balanced.
So I posted the following: “Bill Mitchell is absolutely right here; Yves Smith is dead wrong.”
The post was censored.
Then I posted: “I was censored in this blog despite not having been in any way offensive”, and reproduced my first post.
It was also — quite immediately — censored.
So you have it: “The lady is a tramp” — and irascible.
“failing to do so wouldn’t stop people using cash: they’d use Euros and Greece would end up like Argentina only worse.”
Why. Where is the mechanism?
There is nothing wrong with people using Euros. If they use Euros and save in Euros than all you do is run a balanced budget in the state scrip by taxing appropriately and ensuring that the issuing of the scrip is suitably restricted.
It really doesn’t matter. What matters is that you can command what resources you need to deploy by enforcing a charge on people.
The size of the currency area has nothing to do with the physical borders of the country it is running within. It is to do with the size and effectiveness of the tax collection system and any leverage you get from your scrip via the regulated banks.
Neil: “It is to do with the size and effectiveness of the tax collection system”
The issues are with the tax collection system in many countries and Greece is an example.
Some decades ago a friend of mine was a principal in a US company that acquired another US company with subsidiaries in the UK and also southern Europe (not Greece). The principals of his company went to inspect their new acquisitions abroad. In the UK, my friend reported that everything was just as one would expect, very British, which they found charming and quaint, but the food rather bland.
Then they moved on to the company in souther Europe where they were first wined and dined, taken sightseeing, and treated to that sort of hospitality to establish a relationship first. My friend said it was one of the memorable occasions of his life. Very high class, on one hand, and they had a rollicking good time, too. He said the food and wine were out of this world.
Finally they got down to business and my friend, and the other principals in the acquiring company asked to see the books. The principals of the subsidiary were very forthright and frank. They explained that there were actually three sets of books – one they showed the government, one they would be showing my friend and his associates, and one that only they had access to. My friend and his associates were somewhat astonished but were OK with that arrangement as the way business is done there.
Dear Bill,
I can understand the mechanism for setting up a parallel system to electronically handle internal payments
and certainly this could be refined in such a way as to favor tax receipts, for example automatic transfer of
VAT to a government account without depending on the recipient to do so. This would be a big help.
What I don’t grasp yet is how will this new currency be converted to Euros, Dollars, etc. for the purchase of goods which are imported and are vital to the country’s economy? Let’s not forget that about 60% of national consumption here is imported stuff and a large majority of even locally produced goods need some foreign import to complete – for example plastic to make bottles or yoghurt cups with. Sure there will be some inflows from exports and tourism (how would this work – would tourists be able to use euros directly, or would they have to buy drachmas??) but it is not enough to cover the country’s needs. If on the other hand you let tourists use euros as cash, you’re back in the same hole again trying to collect the VAT from the retailers. You would have to have drachma cash cards that could be bought for euros – something like phone cards that deplete as you use them up. Also, how would international credit cards be connected to this new system?
Would appreciate if you could expound a bit on this critical side of the equation. Thanks.
Boy that was fast, I obviously wasn’ t the only one asking Bill if he had seen that article.
Yves: read Bill’s blog.
By the way she is a bit weak on MMT
The issues are with the tax collection system in many countries and Greece is an example.
where is the big difference between that thinking and thinking that the US has very limited spending capacity due to the massive tax avoidance of corporations?
Yes but tax avoidance is only the extremely rich and US states have fairly large property taxes to maintain the value of currency. Savings act as voluntary tax.
Also US has more real resources.
It seems that at this point if you don’t agree with Yves, Nathan Tankus or Lambert on the TINA narrative, and technical impossibility of Grexit due to IT meltdown, you are no longer welcome on Naked Capitalism.
I knew the jig was up when they shut comments on most threads. The slap downs have become increasingly snippy if they allow anything through at all.
As the Red Queen says “All ways are my ways!!!!”
Jon Hooper: It seems that at this point if you don’t agree with Yves, Nathan Tankus or Lambert on the TINA narrative, and technical impossibility of Grexit due to IT meltdown, you are no longer welcome on Naked Capitalism. Yes. I tried to correct Naked Capitalism on clear, indisputable legal falsehoods promulgated there contrary to all sources, even the ones used to “support” the falsehoods. I highly recommend Neil McCormick’s Questioning Sovereignty – which Bill quoted here – for theoretical legal background. Where does Bill get the time to do all this homework & writing!
I think Yves has done a lot of good, but like the rest of us, is her own worst enemy. That blog is being wrecked by dogmatism which would not be appropriate for any blog that has intellectual aspirations, even if the blog-dog were absolutely right.
Aidan Stanger: The above criticism assumes a Grexit. If instead Greece stays in the Eurozone but issues Drachma as a LETS to alleviate the worst effects of austerity, I don’t know what would happen. This doesn’t make sense, because it expresses a misunderstanding – commoner than I thought, of what a Grexit is. Grexit = Greece “staying in the Eurozone” meaning anybody can do what they want with Euros, but issuing Drachma as a LETS (Local Exchange Trading Scheme I assume). Grexit=LETS. The Euro is a LETS, relative to the dollar! This misunderstanding is a practical reflection of a theoretical misunderstanding – the Legal Tender Chartalism due to Schumpeter. Legal Tender ain’t important. Taxation is.
Part of the problem at Naked Capitalism is that some there have similarly but more overblown ideas of what a Grexit is – verging on an old Soviet bloc type total control of all types of currency & exchange. I imagine that would be harder to do than a new currency, a Grexit as discussed by reasonable economists.
I agree with you on issuing cash. I don’t think Bill’s friend’s argument makes much sense, because the “cash” transactions will occur in any case, so no drachma notes almost certainly means shrinking drachma usage and the drachma tax bite, not increasing them. Drachmas should be used and saved as much as possible and all legitimate taxes enforced. IMHO, it would be bad psychology too – I think it is his very large-transaction experience which is misleading him.
The more I think about the red herring of IT issues preventing a Grexit the more I think there has to be vested interests involved that don’t want it to happen. If IT issues were such a big issue then countries would never be able to join the Euro. The fact they can means they can certainly exit if they really want (have?) to. It’s just an overwhelming case of FUD (fear, uncertainty and doubt) to make people think it’s too hard do we better not try. It also provides a distraction from people actually spending real time thinking of how to do it.
Humans can do amazing things if they want to. Changing a currency is certainly not the most complex thing humans have every done. It’s as simple as that.
Perplexed: What I don’t grasp yet is how will this new currency be converted to Euros, Dollars, etc. for the purchase of goods which are imported and are vital to the country’s economy? Let’s not forget that about 60% of national consumption here is imported stuff and a large majority of even locally produced goods need some foreign import to complete – for example plastic to make bottles or yoghurt cups with. Sure there will be some inflows from exports and tourism (how would this work – would tourists be able to use euros directly, or would they have to buy drachmas??) but it is not enough to cover the country’s needs.
The problem, with Greece being the object of an IMHO unprecedented proportion of bad facts & figures out there- is what is “known” that ain’t so. 60% of Greece’s consumption is NOT imported stuff. According to the World Bank imports are about 35.3% of Greece’s GDP 2014, while exports are about 33% of Greece’s GDP. So both are about a third. not 60%, and they are roughly balanced, perhaps a surplus in 2014 according to other sources. (Same story for food sector in particular too.) So exports are enough to cover the country’s import needs. This makes Grexit simpler as Mark Weisbrot notes.
The new drachma currency will be converted to Euros and back by
a) people & businesses who need drachma to pay their tax bill,
b) people & businesses who need drachma to pay people & businesses who need drachma to pay their tax bill,
c) people & businesses who need drachma to pay people & businesses who need drachma to pay people & businesses who need drachma to pay their tax bill …….
Hope you get the idea! These might be people & businesses with euros coming from tourism or shipping or food exports or refined petroleum product sales …. – but no drachma!
And the Greek government will be the only ultimate source of drachma – which would mainly be spent on its purchases of goods and labor & on remobilizing enormous, untapped, scarce, austerity-wrecked and squandered resources, the Greek people’s labor above all. Also, you might have a million Euros, but if the Greek government will only give you 1 drachma for 10 Euros, and you owe 1000 drachma in taxes, that tells you how many Euros you might have to part with.
I obviously think that the NK article is biased.
What I think is the real problem is that post-Grexit economy can be sabotaged by European banking sector and corporations dependent on European banks. We can imagine a similar attitude as displayed towards Russia after annextaion of Crimea – but for different reasons. If the ECB managed to effectively shut down Greek banking system to successfully break the spine of the anti-austerity movement, what kind of “fiscal waterboarding” would have happened if the Grexit had eventuated? What if Greek state would be dragged to courts by various entities owning Greek state debt? What if they start sequestration of Greek property abroad? What if Greek agricultural products are suddenly discovered to not conform to EU food standards? If the so-called Capital wages a war on a small, impoverished “democratic in a wrong way” European state – the result is rather obvious.
It is enough to spend 5 minutes reading neoliberal propaganda in Polish media peddling “truths” about lazy Greeks (almost as bad as the communists) who wasted borrowed money to see that the EU urgently needs a scarecrow to be crucified. Why? Because the Poles suffered more, they used to have 20% unemployment, >5% of population left. Now the Greeks have to suffer – such is life. The punishment must be severe and the humiliation as deep as possible. Apparently the social mood in Germany and Eastern Europe is pretty supportive towards demanding these Greek “thieves”, “tax dodgers” and “cheaters” to pay back all the hard earned by the North Europeans money. Such is the logic of “debt servitude”.
The “democratic” German state has a tradition of exercising economic power to achieve far reaching political goals – only sometimes it did not work. There is an interesting article on Wikipedia about “German-Polish customs war” from 1925-1934. One may say that this was 90 years ago and now both Germans and Greeks are “Europeans” sharing the same idenity but what we know about recent “fiscal waterboarding” support the thesis that not much has changed from the time Gustav Stresemann was the Foreign Minister of Germany (and got a peace Nobel prize). There are Europeans and more-European Europeans. There are stray cats, farm cats, fat cats and Choupette Lagerfeld.
We don’t know how and by whom Tsipras was threatened to sign on the dotted line – whether the Americans also contributed. I think that at least YV tried quite hard to bargain. What I find upsetting is that when they failed to achieve anything and actually made the economic situation far worse due to the shutdown of the banking system in Greece, only YV and a few “lefties” had the courage to resign. I think that it is quite common in politics and public life to make mistakes or fail but it is actually what happens next what can distinguish a true old-fashioned statesman from a modern politician “made from blairite, covered with teflon” bolted to the chair. Tsipras and his self-delusional so-called ex-true-Marxist team seem to think that they still have a democratic mandate to lead Greek state towards the full loss of any traces of what was forlerly known as “sovereignty” – and to further damage the society. If we stick to the 1920s let me quote Marshall Jozef Pilsudski: “To be defeated and not submit, is victory; to be victorious and rest on one’s laurels, is defeat.” These deluded groupthinkers from Syriza not only submitted but even feel victorious after a major defeat.
All the talk about achieving debt reduction down the path is delusional. Syriza’s Euro-puppets will be responsible for throttling Greek economy and selling off Greek assets at least until the next elections. This was usually the job undertaken by various liberal-conservative parties. The traditional (currently not recommended) method of teaching a puppy not to soil the carpet is being used on a macro scale. Greek society will be punished by the Troika for as long as it takes to elect a loyal “technocratic” government. If and when this happens, suddenly Greek junk bonds will become as good as Italian or Spanish formerly-junk bonds. The yield will be set by ECB at the appropriate level. Because Euro is irreversible just as a HIV infection.
The most interesting aspect of Functional Finance is that it is not only an analytical framework. Framing in this case creates new reality. If a state has a central bank incorporated into the central government structure then public debt denominated in domestic currency is just a wealth storage for the private and foreign sectors. If there is no control over the central bank, which chooses not to cooperate, all the debt is foreign-denominated. One day Greek state has to repay every cent of what they ever borrowed (even in the era when they had Drachmas). But this may change if Mario Draghi changes his mind (or is told to). Greek public deby will be repaid exactly at the same time German public debt is repaid. It is just a convenient interest bearing debt instrument, an entry on a balance sheet having very limited real impact.
I think that Tsipras should resign and apologize. He is making things in Greece much worse compared with what New Democracy or Pasok could have got with their “soft power” from the EU overlords.
It is not good to be a scarecrow anyway.
Bill:
Thank you for these two posts. The issue at Greece was never the “complexity” of IT systems (assuming a base level of competency), but a politIcal unwillingness for Syrzia (the leadership) to ever seriously consider Grexit even as a negotiating ploy.
When the left (using the term with abandon) throws up pseudo problems like IT, and further uses incoherent and irrelevant arguments (transition to the Euro was complex?!?), you have to wonder what is going on.
I don’t know what has happened to NC. Today there is an article about Social Security and demographics from some Barnhard professor which is filler at best and at any rate worse than wrong.
“According to the World Bank imports are about 35.3% of Greece’s GDP 2014, while exports are about 33% of Greece’s GDP.”
Globalization have internationalized supply chains and in more advanced countries the export sector is the largest importer. In general export and import percent relative GDP have reared sharply in tandem. If this isn’t taken in to consideration one doesn’t know if export relatively have grown, how much value is added locally in the export after the import part is deducted. Likewise the import for local consumption. Actual Greece import consumption is probably much lower than the 35 % relative GDP.
This is an important part of the neoliberal con game, export or die, downplay the importance of the domestic economy. But in general it’s the totally dominant part of most modern economies.
And exports and imports isn’t a part of GDP, the measurement is relative to GDP, only the net is part of GDP. If you are a special case like some small export tiger export and import can be more than 100 % relative GDP
Like the Swedish export tiger, in the post war boom decades export was 17 – 20 % relative BNP now it’s close to 50 %. But back then it was more of ax to loaf production than now when export sector also is the largest importer. At the GFC export fell in tandem with import with a minor dent in the net export.
The 17 – 20 % is in the general debate considers as the golden age of Swedish export while at 50 % we are in a permanent export crises manhandled by globalization and the working class have to be modest or else the Chinese will eat us alive for breakfast. But no one seems to know or care if the value added in Sweden by export sector have grown in any significant way. In some export industry cases as much as 80-90 % of export is imported.
BTW
Maybe the Greece scare of a grexit on technical grounds is a cultural issue. One couldn’t imagine the Germans using that as argument if they didn’t want to do something. Who would have believed them, not the people of Germany, that it would have been impossible because of the technical and organizing challenge.
What you describe here is very resemblant to what was apparently in the works under the management of Varoufakis, if we are to believe the transcript which was leaked to Ekathimerini:
http://www.ekathimerini.com/199945/article/ekathimerini/news/varoufakis-claims-had-approval-to-plan-parallel-banking-system
Yes, I agree entirely with you /L as usual – was just grabbing a quick figure from the web; there is a lot of weird fearmongering fake facts out there – some propagated by formerly sane economists, in sources like the NY Times. IMHO, to be sure of ordinary accuracy, one has to do an unprecedented amount of fact-checking for the Greek situation.
The oil sector is interesting – because of low domestic demand, it has become an important export earner – buying crude, selling refined products, just as you say. What is interesting is that Greece has already had to resort to financing outside banks. So the payment situation for absolutely necessary oil imports, even after an unfriendly, unplanned, forced Grexit – could probably be resolved with a few phone calls. See Greek refiner Hellenic’s darkest days over as oil options grow. There really isn’t much damage that the Troika could do after a Grexit that they haven’t tried already.
This is an important part of the neoliberal con game, export or die, downplay the importance of the domestic economy. But in general it’s the totally dominant part of most modern economies.
Yes. Reminds me of one of my favorites- something famous at the time, but forgotten, and if not, derided in most histories of the period.
But in 1937 FDR said he was prouder of it than anything else he did- and I think he was right!
In one sentence: “The sound internal economic system of a Nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other Nations.”
What is the Euro but a “fetish of so-called international bankers” based on “basic economic errors”?
FDR’s USAExit declaration: Wireless to the London Conference
RE: Perplexed
I work for a certain multinational card processor and I can tell you the GRD is still embedded in our systems as a legacy consideration. There would be no issue switching it back on and currency trading,especially if it it is electronic would quickly set a market rate against other countries and the EUR itself. It isn’t the big issue you may think it is, as we already have operations in Greece bank accounts for us to handle the new flows would be set up as part of the roll out of the new GRD.
“Would tourists be able to use euros directly, or would they have to buy drachmas??” They would need to buy drachmas, this action will stabilise the drachma against other currencies and help establish its trading rate.
“Let’s not forget that about 60% of national consumption here is imported stuff and a large majority of even locally produced goods need some foreign import to complete” OK so even if they consume 60% imported goods, GREAT, that will help devalue the drachma and increase the external demand for their domestically produced goods and tourism. That is the entire point of them issuing their own currency to begin with. Everything that devalues the drachma initially will have a positive effect on their economy as it will provide stimulus for employment.
But I hear cries of inflation, well you will get some but only if there is some kind of mass hysteria and people start believing things are worth more than they actually are but it doesn’t really matter the idea is to have a currency that is devalued. Part of the reason they are in this pickle in the first place is the EUR can’t be devalues significantly enough by Greece alone because of all the other economies propping it back up.