[Marxism] Why Greece Should Leave the Eurozone
lnp3 at panix.com
Sat Jul 25 11:53:27 MDT 2015
(Sinn is one of Germany's most prominent economists although I had never
heard of him before. His dissertation was on Marx's theory of the
falling rate of profit. I have no idea whether it was to support it or
attack it but probably the former. He has been a reactionary pig for
most of his career and thus his call for Grexit is of some interest.)
NY Times Op-Ed, July 25 2015
Why Greece Should Leave the Eurozone
By HANS-WERNER SINN
MUNICH — THERE are not many issues on which I agree with my colleagues
Paul Krugman and Joseph E. Stiglitz and the former Greek finance
minister Yanis Varoufakis. But one of them is the view that an exit from
the eurozone would be advisable for Greece.
Unfortunately for Greece and for Europe, we may now have to live with a
third bailout program, in which Greece will receive a rescue package
worth 86 billion euros (about $94 billion) in return for additional
austerity measures. The new agreement will most likely drag Greece
through three more years of a long-lasting, costly experiment that has
so far failed miserably.
As of June, the eurozone countries, the European Central Bank and the
International Monetary Fund had provided the Greek government and
banking system with 344 billion euros ($375 billion) worth of public
credit — nearly double Greece’s annual economic output, or about 31,000
euros ($33,000) for each Greek citizen.
One-third of the public credit that has flowed to Greece since 2008 has
been used to bail out private creditors; one-third went to finance the
Greek current account deficit (the excess of imports and net interest
payments to foreigners over exports and transfer payments from abroad);
and one-third vaporized by financing the capital flight of Greeks.
The public credit has delayed a Greek bankruptcy, but it has failed to
revitalize the Greek economy. To compete, Greece needs a strong
devaluation — a relative decline of its price level. Trying to lower
prices and wages in absolute terms (for example, by slashing wages)
would be very difficult, as it would bankrupt many debtors and tenants.
It would arguably be better to inflate prices in the rest of the
eurozone, as the European Central Bank is trying to do through
quantitative easing: purchasing large quantities of bonds to drive down
the value of the euro. If the rest of the eurozone posts inflation rates
of slightly less than 2 percent, as the E.C.B. hopes, Greece would be
competitive after a decade or so, provided that its price level stays
put. However, even such a mild form of an “internal devaluation” would
be very arduous, as it would require precisely the kind of fiscal
restraint that the Greeks rejected in the referendum.
What about the solution favored by leftists: more money for Greece? No
doubt, enormous government spending would bring about a Keynesian
stimulus and generate some modest internal growth. However, apart from
the fact that this money would have to come from other countries’
taxpayers, this would be counterproductive, as it would prevent the
necessary devaluation of an overpriced economy and keep wages and prices
above the competitive level.
Take the case of Ireland. Like Greece, Ireland became too expensive, as
interest rates fell sharply during the introduction of the euro. When
the bubble burst, in late 2006, no fiscal rescue was available.
The Irish tightened their belts and underwent a drastic internal
devaluation by cutting wages, which in turn led to lower prices for
Irish goods both in absolute and relative terms. This made the Irish
economy competitive again.
Granted, Ireland also received fiscal aid. But that came much later,
toward the end of 2010, and when it came, the internal devaluation
stopped almost immediately. Twelve of the 13 percentage points of the
Irish decline in relative product prices came before that date. Of the
eurozone countries hardest hit by the financial crisis, Ireland will be
the only one this year to see its G.D.P. surpass its precrisis level.
Greece’s devaluation started five years after Ireland’s, and by now has
reached 9 percent. Analysis by Goldman Sachs researchers suggests that
product prices would have to decline by another 13 to 22 percentage
points for Greece to be competitive. (Wages in neighboring Turkey,
Bulgaria and Romania, the latter two being European Union members, are
only one-third to one-fifth Greece’s level.)
The better alternative is a Grexit accompanied by debt relief,
humanitarian aid for the purchase of essential imports and an option for
eventual return to the euro. Greece could reintroduce the drachma as the
only legal tender. All existing prices, wages, contracts and balance
sheets, including internal and external debt, could be converted
one-to-one into drachmas, which would immediately decline in value.
The devaluation would induce Greeks to buy domestic rather than imported
products. Tourism would get a boost, and capital flight would be
reversed. Rich Greeks would return with their money, buy real estate and
renovate it, fueling a construction boom. As the trade deficit gradually
turned into a surplus, creditors would get some of their money back.
Greece would have the option to return to the eurozone, at a new
exchange rate, after carrying out institutional reforms — such as public
recording of land purchases, functioning tax collection, accurate
statistical reporting — and meeting the normal conditions for eurozone
membership. It could take five or 10 years.
It is true that Grexit would make it clear that membership in the
eurozone is not irrevocable and could expose member countries to
speculative attacks. But this is not very likely, as the markets’ calm
reaction to Greece’s capital controls and the “no” vote in the
referendum showed. More important, it would lead other countries to
adopt more prudent financing and steer clear of the debt trap that
caused the bubble in the first place.
Until Europe is turned into a federal state — as it should become, at
some point — it will not have a currency like the dollar. Until then,
what is needed is a “breathing” currency union, with orderly entry and
exit options, coupled with an insolvency rule for member states. This
would be a better compromise between the goals of avoiding speculative
attacks and excessive debt accumulation than the current promise of
Hans-Werner Sinn is a professor of economics and public finance at the
University of Munich.
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