[Marxism] Why Greece Should Leave the Eurozone

Louis Proyect 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

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 
eternal membership.

Hans-Werner Sinn is a professor of economics and public finance at the 
University of Munich.

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