Monday, July 6, 2015

Why Greece should leave the Euro


Now that the Greek referendum's results have come in, I would like to briefly chip in with my views on the Greek financial crisis. In a nutshell, I think Greece should default and leave the Euro, for its own and everyone else's sake.

First of all, let me state that I am not against European integration as such. I think that the whole of Europe trying to move towards common laws and standards makes sense, and allowing Europeans to travel and live freely throughout the continent is a wonderful step forward. On the other hand, I feel that creating a single currency for such a lot of countries with quite different levels of economic development and differing political and economic systems has turned out to be a real mistake.

Looking back, it might have been better if only the richer countries of Northern Europe (Germany, Austria, the Benelux countries, Finland and at most France) had adopted the Euro. All of the weaker countries within the Eurozone (Italy, Spain, Portugal, Ireland and Greece) have paid a heavy price for giving up on their own currencies. And Greece, the poorest country to adopt the Euro, has paid the heaviest price of all.

The truth is that Greece is not, in spite of popular perception, a Western European country. Socially and politically it belongs to the Balkans, or even the Levant. That it should be using the same currency as Germany and the Netherlands makes little sense. The responsibility for the mistaken decision of allowing Greece into the Euro has to rest mostly on the shoulders of the richer and more powerful countries in the EU, and of the European Union as a whole.

It is of course true that Greece engaged in some "creative accounting" in order to qualify for the Euro. But is it really believable that the other European governments and the European Central Bank didn't know about this? Misplaced idealism and an eye on quick profits obviously took precedence over caution.

On the other hand, Greece's ruling class also has to take some of the blame. In 2002 the vast majority of Greece's elite, just like the vast majority of the Italian, Spanish and Portuguese elites, where entirely in favour of adopting the Euro. It is quite understandable that the ordinary people were enthusiastic as well, seeing the adoption of the Euro as proof that their country had finally "arrived" and was going to turn into a little Germany on the Mediterranean. The politicians, on the other hand, might have seen what was coming.

Much of the public in Northern Europe takes the easy way out and blames the Greeks for not paying their taxes and being corrupt. The Greek system is indeed not on a par with Germany or Belgium in terms of efficiency and transparency, and that should have been assessed before allowing the country into the common currency to begin with. Blaming the ordinary people of Greece, most of whom have toiled honestly and paid their taxes all their lives and now find themselves suddenly tasting destitution, is unfair.

I am no expert on the Greek economy in particular or on the terms of the bailout. All the same, at the risk of sounding naive, I am going to state my opinion that the best course of action for the Greeks in the long run might well be to leave the Euro and adopt the Drachma again. They can then devalue their currency until the economy gets back on track.

As for the huge foreign debt the country faces, defaulting might be the best solution. Other European countries and the IMF have already poured a lot of money into Greece so that it could be used to pay back its debt to foreign banks. To a large extent the tax-payers of Western Europe paid to bail out their own banks. Now Greece is left with a huge debt to other European countries and the IMF, which it will keep having to borrow to repay. There will never be a route out of this crisis unless the debt stops being repaid, once and for all.

11 comments:

franmau said...

I quite disagree this time. Surely the economy, the social attitude and so on of Shanghai business distrect are very different from the remote countryside. Yet they do manage to have a single currency. Surely the same holds for NY financial district compared to a small rural town in the States. And yes, they do manage to have a same currency.
The problem is not the currency. The problem is that what has been done is not enough. The solution is not to run away, but quite the contrary, to improve the integration system, to arrive to a political union. We need people and goverments who first think about themselves as Europeans, likewise Chinese and US people do.

Ji Xiang said...

@Franmau: quite honestly, the comparisons you make don't make sense. We're not talking about the difference between a big city with a small town. We're talking about different countries. Different languages, cultures, histories, and governments. Not the same thing at all. I want more integration too, but I think integration shouldn't start with a common currency for everyone. That should come at the end, after everything else has been standardized. For the time being, Greece (at least) has to leave the Euro.

Lanny Yeh said...

Gariele, the way you are explaining this sounds like Social Constructivism, which fits in my thinking about the crisis.

Alexander Wendt calls two increasingly accepted basic tenets of Constructivism "that the structures of human association are determined primarily by shared ideas rather than material forces, and that the identities and interests of purposive actors are constructed by these shared ideas rather than given by nature"
https://en.wikipedia.org/wiki/Constructivism_(international_relations)

franmau said...

"Different languages, cultures, histories"... wait! that sounds like China! Even looking at the banknotes you can see that :)

Ji Xiang said...

@Franmau: superficially it may seem like that, but there's really no comparison between Europe and China in terms of diversity. 90% of China population is classified as Han. They are all basically one people. Yes there are regional differences and different dialects, but the basic culture is the same. They have had the same written language and the same emperors for millennia. The cultural differences between the Han from the extreme North and the extreme South of China are smaller than those between the French and the Germans. Much smaller, in fact.

Yes, there are ethnic minorities in China, whose languages you can see on the banknotes, but they are small groups who can do nothing to affect the majority. You could regard them mostly as curiosities.

Ji Xiang said...

@Lanny: I don't know about that. I think ten years ago there was a "shared idea" in Greece and Germany. People were genuinely enthusiastic about the Euro in both countries, and in the whole of the Eurozone in fact. What got in the way of the shared idea was harsh reality.

Renato Corsetti said...

If Greece were a bank, it would have been saved long ago. This is the most intelligent comment I have heard from a Dutch historian. Tell me the Dutch historian is wrong.

FOARP said...

A few points:

1) Greece was not the poorest country to adopt the Euro. Slovakia (who are, ridiculously, contributing for Greece's bail-out) is much poorer.

2) I notice you don't include the UK as a joinee - perhaps because most British people oppose EU membership?

3) "is it really believable that the other European governments and the European Central Bank didn't know about this?" - I've seen a lot of people saying this, but they never provide any evidence as to why people should have known that things were as bad as they were. Taking China as our example - we all know that GDP growth is over stated, but wouldn't you be surprised to suddenly discover that GDP growth was a quarter of the official figure? Yet Greece was understating its budget deficit by nearly four times (i.e., they were saying that it was 3.5% of GDP when it was really closer to 13%).

4) "To a large extent the tax-payers of Western Europe paid to bail out their own banks." - I've read some people saying this with the heavy implication that all the creditors were doing was paying money to themselves, when in reality they were making good Greece's debts and transferring the debt (after a 50% hair-cut that mean private investors got back 50 cents for every Euro they lent Greece) into low-interest loans on easy terms.

However I agree with your central point: Grexit might actually be better than staying in, but only because it might enforce discipline on the Greeks, and allow them to recover through devaluation. It won't, however stop the Greeks blaming everything on other countries, and it would have catastrophic consequences for the Greek economy resulting in in compulsory austerity in the short and medium term. Indeed, one view-point is that the Greek government has already resigned itself to leaving the Euro, they just want to make it look like it is not their fault.

FOARP said...

Urp, pressed "publish" too soon, this should read:

"2) I notice you don't include the UK as a potential joinee - perhaps because most British people oppose Euro membership? "

Ji Xiang said...

@Foarp:

1) Actually Estonia is poorer than Slovakia.

2) I don't include the UK because it's obvious they will never agree. Most Brits don't even want to be in the EU at all. If they wanted to be in the Euro, they certainly would qualify.

3) This is not China we are talking about, I'm sure that finding out some real information wouldn't have been difficult. The point is that nobody wanted to. Thanks to Greece adopting the Euro, Germany exported masses of products there in 2002-2008.

4) It's not that the creditors are "paying money to themselves", rather the taxpayers are paying money to the banks. It's true that the creditors are making good Greece's debts by bailing it out. But does it strike you that if certain European banks made a bad decision to loan money to Greece, maybe they should face the consequences, without the tax-payers helping Greece to repay its loans? If banks loan to the wrong person or entity, they should lose their money.

Of course the Greeks tend to blame everything on other countries - they're human. Unfortunately that is to be expected. If Greece had its own currency, it will be much harder for the public to blame Germany or others for their problems. As for the "catastrophic consequences" for Greece of leaving the Euro, would they be any worse then what's happening now?

justrecently said...

The real tragedy - after the tragedy of "admitting" Greece into the Eurozone - is the successful "Euro" propaganda. Greeks are caught between the hunch that there is nothing to gain from staying with their Eurozone "partners" for now, and the idea (and quite possibly a misconception) that switching to a currency of their own again would spell the end of days.

Argentina might be a good model for a Greek default. But that would require a strong Greek political will. EU political will, too, because Greece will continue to epend on EU support, just as it did prior to 2001.

Besides, I'm afraid, Argentina's institutions are stronger than Greece's. But what is really poisonous is a climate where Greece is forced into one destructive round of "saving money" after the other, without any chance that it could solve the problems.

Sovereignty counts - no less in Europe, than anywhere else.