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Greece could leave the EU: why the Grexit option deserves consideration

With the Greek psyche itself the victim of a relentless shaming campaign, the idea of Greece “going it alone” begins to seem outlandish and quixotic. It is not. But it is as much tied to a revival of spirit and self-esteem as to the nuts and bolts of economic transformation.

by Michael Nevradakis

Part 6 - Why leave?

           The euro is essentially a debt instrument: According to economist and former central banker Spiros Lavdiotis, the European Central Bank does not lend directly to its members—i.e. the member states of the eurozone. It instead lends to the private sector, at interest. In turn, the private sector lends to states who seek to borrow money, at higher interest. This perpetuates the debt cycle, while the higher interest is often financed in the form of budget cuts or higher taxes.

           Restoring monetary sovereignty – external devaluation instead of internal devaluation: What has taken place during the years of the economic crisis in Greece is essentially a process of “internal devaluation.” This means that the cost of labor in Greece—that is, wages, insurance contributions and the like—have been slashed, purportedly in an attempt to boost the country’s competitiveness.

Traditionally, however, many countries have employed a different remedy for responding to an economic downturn: external devaluation. Instead of cutting wages and pensions at home, the value of the national currency would be devalued, immediately making the country’s exports, services, and labor cheaper and more competitive on a global level, compared to other stronger currencies.

External devaluation also helped foster much-vaunted foreign investment (as the cost of investment would decrease) in economic sectors such as tourism, as the country proceeding with an external devaluation would automatically become cheaper for foreign visitors. With domestic wages, pensions, and social services unaffected, quality of life was largely not impacted by an external devaluation.

The main disadvantage with external devaluation is that the cost of imports rises. This, however, was traditionally offset in two ways: paying for imports with foreign hard currency reserves (which can indeed increase if foreign tourism and investment in the economy increases), and by increasing domestic production, where possible, to alleviate the need for imports. This promoted domestic industry and a policy of full employment.

But today, countries such as Greece are saddled with a hard currency that is overvalued for the needs of the domestic economy, and where there is no level of control on monetary policy. If this seems like a mere unfortunate consequence of the euro, think again: Roger Mundell, the Nobel Prize-winning economist and architect of the euro, foresaw precisely this eventuality.

In Mundell’s vision, as eurozone economies were squeezed with the first sign of an economic downturn, all of the traditional monetary policy tools would be unavailable in their policy-making toolkit. Unable to devalue the currency or to increase deficit spending due to EU rules, governments would be left with one choice: austerity. Cut wages, cut pensions, slash social services to the bone. It’s a neoliberal wet dream—and it is the European “dream” today.

           Escaping stifling EU fiscal rules: Currently, EU member-states must abide to strict EU fiscal rules as part of its Stability and Growth Pact. The main rules are that total government debt must not be more than 60 percent of GDP, and government deficits must not exceed 3 percent of GDP.

At face value, this sounds reasonable and prudent. However, the problem with these rules is that they eliminate many of the traditional tools that were available in the fiscal policy toolkit during times of economic recession. Deficit spending, for instance, has enabled many sputtering economies to get back on track, as cash re-enters the economy, encouraging consumer and business spending and private lending. Limiting this ability handicaps countries which are stuck in a recession.

Indeed, one of the primary ideas behind such rules is, quite cynically, to reduce the political cost of what would otherwise be unpopular policies: cuts to social services and pensions and the like.

It should be noted here that leaving the eurozone or even the EU does not mean an automatic green light to act recklessly. But it will afford a country like Greece the freedom to take control of its fiscal and economic policy. Notably, for Greece, the EU has determined that the aforementioned strict rules do not go far enough. Greece’s current “leftist” SYRIZA-led government, entirely subservient to Brussels and Berlin, agreed earlier this year to achieve a primary budget surplus of 3.5 percent annually each year through 2023, and primary budget surpluses of 2 percent annually through 2060.

This certainly contradicts Prime Minister Alexis Tsipras’ current rhetoric regarding the official end of the crisis coming sometime in 2018. A primary budget surplus means that the state spends less than it takes in. For a country with a stagnant or shrinking GDP such as Greece, this means spending an ever-shrinking amount of money. And as government revenues dry up, the surplus target is met by further cutting spending, creating a perpetual austerity death spiral. As of now, this is the economic future Greece faces, no matter what Tsipras, the EU, or the media claim.

           Increased competitiveness on the global markets: Free of EU fiscal and monetary shackles, Greece will be free to enact its own policy, including future devaluations of its newly-restored domestic currency (more on devaluation in part three of this series).

When a country such as Greece is ready to take this step and devalue its domestic currency, it will be able to better compete globally in its three cornerstone economic sectors: tourism, agriculture, and shipping. Greece will be a less expensive destination for foreign tourists, while Greek agricultural products and Greek services will be comparatively less expensive. And this will take place via a process of external devaluation, rather than cutting domestic wages and reducing the quality of life.

Greece has an educated and multilingual workforce, as well as lots of untapped or deprecated (due to EU) agricultural potential. Tourism, while increasing in raw numbers, has a lot of potential for growth, especially since average spending per visitor is far less than other countries.

An increase in foreign trade, exports, and tourism will, in turn, ensure that Greece will maintain the necessary foreign hard currency reserves with which it will import vital goods that it cannot produce domestically. This is how the Greek economy operated prior to entering the eurozone in 2002, and it is how even the poorest of states are able to import oil, automobiles, medicine, or other necessities.

           Rolling back austerity: Every sector of the Greek economy has been impacted by the austerity measures that have been imposed by Greece’s lenders in the troika since 2010.

Free of a requirement to sustain a primary budget surplus, Greece would have the ability to increase spending in vital social sectors such as healthcare and education, to at least partially restore pensions and salaries that have been repeatedly slashed, and to cut taxes, such as the heating oil tax which has resulted in most Greek households not being able to afford to heat their homes in the winter. Other cuts could be applied to the value-added tax (VAT), which even for many staple items is a hefty 24 percent, as well as high business taxes that are choking the life out of Greece’s traditional economic base of small businesses.

Even without funding coming from the EU, the ability to increase spending could also allow the state to jump-start infrastructure projects or to continue existing public works. Measures could also be financed to reverse the country’s “brain drain” and to attract some of the 600,000 Greeks who have emigrated, back to Greece.

           Protecting and promoting industry: Free of the requirements of participating in the European common market, a country like Greece will be less exposed to unequal or unfair competition from industrial powerhouses such as Germany, which has flooded domestic markets with cheap imports, while domestic industries have been shuttered or bought out.

Furthermore, liberated from the requirement of enforcing production quotas under such policy frameworks as the EU’s common agricultural policy, Greece will be able to enact measures to return agricultural production to its much higher pre-EU levels, thereby alleviating many of the concerns regarding the country’s self-sufficiency and “dependence” on Europe for its survival.

           Think people don’t want it? Think again: As was shown earlier, public opinion poll results which claim that overwhelming majorities of Greeks wish to remain in the eurozone and EU at all costs are likely “fake news”—meant to influence public opinion and marginalize opposition. What independent polls have indicated is that, at the very least, a departure from the EU and, in particular, the eurozone will not be nearly as unpopular as claimed—and may perhaps even enjoy the support of a small majority.

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