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28 Ιουλ 2015

Greece’s poor fit in the Eurozone

By Anastasios Retzios

I know that some of the subjects here are a bit too technical for some.  However, they are the core of the current crisis in Greece.I promised answers to some specific issues that seem to pre-occupy some of the members. Here they are: (a)   Optimal common currency area”:  There has been a lot of discussion on this rather very simple idea.  The area that is “optimal” for the introduction of a common currency includes countries and economies that are expected to behave identically at financial challenges.  To make this simple, an “optimal area for a common currency” is one in which the economy will show the same resilience (or weakness) upon a “down” business cycle or recession.

In essence, this optimal area would consist of countries with very similar economy and very similar capabilities.  I think that you can understand, without much of an explanation, as to why Greece does not belong to the same “optimal area” with Germany, Holland or other countries of the European core.  The Greek economy, based on the OECD descriptions of it, is substantially different from that of many of the OECD members because of the following factors:

a.      High degree of reliance on very small businesses (single proprietorships)
b.     Very dispersed capital, poor tools for capital aggregation
c.      Low level of working population participation (just about 65%)
d.     Very low capitalization of public companies
e.      Very low social capital

Exactly because the whole idea of “optimal area” has not been “obeyed” and because countries are expected not to perform identically, the EU has codified the “Growth and Stability Pact”; Unfortunately for most, this Pact, that supposes to deal with economies that endure stresses, simply codifies for the EU the “German-style austerity” policies.  For a treaty engineered by Merkel and Schaeuble, this should have been expected

(b)   Greece’s poor fit in the Eurozone is exacerbated by its insignificance for the ECB.  Greece constitutes barely 3% of the economic activity of the Eurozone.  In that context, the ECB cannot allow Greek concerns to become the predominant driver of its policies.  Its main concern is the German economy, and, secondarily, the “satellite” economies.  Thus, policy at the ECB will always be dictated by the needs of the German economy, even if those run contrary to the needs of the Greek economy.  Greece would be the unfortunate collateral casualty.  

For example, responding to concerns of possible inflation in the German economy, the ECB hiked interest rates in 2011, especially when the Greek economy needed exactly the opposite (having entered into a prolonged recession). In many ways, the German economy distorts substantially the whole Euro area and has even placed other core EU countries in a “stress” position.  Finland and Holland are good examples of economies that are not doing well, especially because of the Euro. 

(c)    Low to moderate inflation is good for the middle class:  With Greece soon to enter a 3rd year of deflation (retreat in prices), and with the current legislation in place, Greeks would soon find out that their debts are becoming much higher than their assets.  So, while the value of their homes declines precipitously, their mortgage remains the same; considering the decline in personal incomes, maintaining their debt at the current level is becoming more expensive by the date.  

However, if we had moderate inflation, the value of their property would have been increasing while the costs of borrowing would be decreasing.   Thus, the “Europhiles” are acting directly against their own interests. 

I will continue with the rest of the subjects tomorrow but it would be great to discuss, parenthetically, the revelations by Varoufakis and what these tell us about the conversion of Alexis Tsipras as a member of the Euro-junta.

Anastassios Retzios, PhD
San Ramon, California