ROCHON On Greece once More

LOUIS-PHILIPPE ROCHON

Associate Professor, Laurentian University

Co-editor, Review of Keynesian Economics

Follow him on Twitter @Lprochon

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As I have said before (see here) and will say again: any solution to Greek’s tragedy, which involves keeping the Euro as a currency is a second-best solution, unless the appropriate institutional changes are adopted. Anything short of this will simply maintain the Euro straightjacket and perpetuate the policies of deflation. Austerity has proven a disastrous and unsustainable policy that has revealed the weaknesses of the Euro. Indeed, without political union, the Euro remains an incomplete (and illegitimate) currency, and the sooner it is replaced with a set of national currencies, the better it is for all countries in Europe.

Interestingly enough, there is virtual unanimity among heterodox economists about the shortcomings of the Euro, yet a deep division exists on whether Greece should leave the Euro or push for institutional reforms, like political union.

Of course, a grexit would carry important short-run costs that cannot be minimized (sudden and large devaluation that can lead to imported inflation, among other problems; and since Greece is not an exporting country, devaluation will not help that much). No one, including myself, is denying the potential destabilizing effects of abandoning the Euro and of leaving the EU. But since the possibility of political union is nil under current governments, the only possible solutions are the status quo or the abandonment of the Euro.

Hopefully, a grexit would be accompanied by a number of urgently-needed policies such as capital controls for instance, and strict limits on bank withdrawals in the period in between the transition from the Euro to the drachma (a number of other measures would also be necessary). It is impossible to estimate how long this transition period would last, but I maintain that the long run benefits of gaining fiscal and monetary sovereignty outweigh these short run costs.

But the current Syriza leadership has stated quite unequivocally that abandoning the Euro is not a policy they are considering, largely I presume, for political reasons as the Greek population heavily favours remaining within the EU and the Eurozone. Of course, this does not negate the possibility that Greece will be pushed out. This is becoming I think an increasingly real possibility. L’enfant terrible of Europe is being seen increasingly not as much as a liability, but as a nuisance, and some are arguing that they would rather be rid of it now and suffer the short run consequences than to keep Greece and try to make it happy. I am convinced, although I have no real proof, that contingency plans have already been drummed up outlining possible scenarios and strategies in case the inevitable becomes reality.

Of course, one cannot but shake his head at the irony: Greece has the first democratically-elected mandate to put an end to austerity, but such a will is being tested and challenged by the political and ideological elites who make a mockery of democracy.

But for now, let us put these scenarios aside. And for the sake of argument, let us take a grexit off the table and consider Greece’s second-best solution for its debt woes.

To get a good understanding of the current desperation, consider some basic facts: the Greek economy now stands 30% below pre-crisis levels; unemployment has skyrocketed to over 25% (more than 60% for youth unemployment), and Greek debt is now more than 170% of current GDP.

What comes immediately to mind is that for now, Greece needs some much-needed breathing room to try to get its economy back on track. To do so, and by keeping its international commitments, it needs to put its debt problems on hold, or what has been called a burdge. It has become clear that a debt write off or any type of haircut is now officially off the table as well. So Greece needs to deal with its entire debt.

A number of possible solutions exist but they cannot all be discussed in such a short space, so I will concentrate on what I consider perhaps two of the most promising ones. First, Rob Parenteau has proposed what is called “tax anticipation notes”, which essentially allows a government to deficit spend and issue notes (tax credits) that guarantee repayment once the economy recovers (see here).

This is an interesting idea that already exists in some US states, but I fear the idea would be too foreign to be taken seriously in Europe.

The other proposal, backed by Stephany Griffith Jones, among others, is to tie Greece’s debt repayment (interest plus amortization) to the (real) growth of its economy, and to transform its existing debt into GDP-linked bonds. This would act in a sense “like a hair cut”, without really being one.

Such a proposal has considerable merit, and would tie the repayment to the growth of Greece’s real economy, thereby making such payments more manageable. Debt repayment would therefore vary according to GDP performance. To be clear, this is not a haircut, but haircut-like: Greece would eventually honour all its debt, but would do so on much easier terms.

There are a number of advantages for Greece, such as the counter-cyclical nature of this policy, allowing Greece to reduce its repayment when the economy slows or goes into recession. This would therefore give Greece more room to deficit-spend (European rules allowing) and reduce the scourge of austerity.

It would also stabilize the debt by lowering the possibility of a Greek default.

Of course, such a policy would have to be tied to much-needed reforms on the ability of Greece to raise revenues in the future, and therefore cut on tax evasion and fraud. International investors would have to have the assurances that Greece is serious about raising revenues. This should not be difficult to adopt, although implementation is another issue.

 Regardless of the solution chosen, the debt imbroglio is only the first step toward a full Greek recovery. Greece then has to wage an all-out war on growth, and get its economy back on some firmer ground. At this point, it will take considerable time and energy, and nothing short of a New Deal (see Theodore Koutsobinas’s blog here).

Of course, there remains the question who how Greece will pay for some a New Deal. But if GDP-linked bonds were adopted, this would precisely free considerable fiscal room and allow Greece to pursue expansionary fiscal policy that would hopefully rebuild the Greek economy. Greece would have to invest in its infrastructure, in education, in its youth, and more.

But again, this strategy simply brings to the fore the Euro carcan, as countries cannot deficit spend their way out of recession, no matter how severe.

In the end, the democratic expression of the people cannot be thwarted. Anti-austerity feelings are running high, and Europe must be careful on how it deals with Greece. Because we risk starting all over again in Spain, with the Podermos Party, which are now leading in the polls in that country. Any attempts at isolating democracy in Greece will only fuel the desire for change in Spain.