The modern Greek tragedy, the Grexit, the euro zone crisis and the currency wars

In this paper we support that, mainly Greece and to a lesser degree the European south are the victims of the overvalued euro and of the strict austerity policies imposed under Berlin guidelines. Most of the faster growing countries support their exports with controlled currency devaluations, as a basic instrument of their independent monetary policy. They follow the Chinese example of implementing proper soft monetary policies, in the light of the present currency wars, mainly between the dollar, the euro and the yen. Greece has surrendered this basic weapon of currency sovereignty to Berlin, whose main concern is the strengthening of the euro, in an effort to verify the German economic and political supremacy. Yet even for the E.U. as a unique entity, this policy appears to be wrong and the virus of stagnation from the south is gradually invading the north. The overvalued euro,  the austerity policies of the euro zone, together with the malpractices of the international markets, are mainly to blame. The imposition of an optimal currency area such as the euro zone in totally different economies and without a fair   political umbrella, has been wrong. For Greece it has been catastrophic. Our   economy is mainly based on tourism that requires a labor-intensive production process. Labor costs can not be compressed below a certain level, so that the total production costs will be lower or

equal to that of our competitors in the Balkans and the Mediterranean Sea. In front of the deadlock, a properly structured Grexit, temporary or permanent, is the only solution. This should be accompanied with a controlled bankruptcy, a generous cuts of debts and extension of their repayment period. The next step is the devaluation of the new drachma initially at 25-30%, as a necessary precondition for regaining the lost competitiveness of the Greek economy. The amount of currency circulation should be controlled   properly so as to avoid hyperinflation. Low and medium   incomes   should be increased eventually at a moderate level and in accordance with the shift towards internal consumption, so as to avoid the dangers of hyperinflation. The strengthening of productive investments and the protection of the social welfare are also necessary. Government spending restrictions, the combat of corruption, impunity, bureaucracy and tax evasion, are also necessary for a healthy new beginning.  

Greece, Grexit, euro crisis, austerity policies, monetarism, Berlin, currency wars

Be aware of the lenders baring gifts

Greece entered the euro currency in January 2002. This was supposed to protect and develop our economy. Yet, the opposite occurred. For many years before living with our historical currency the drachma, we have never experienced a similar catastrophe like today. We may indeed speak for a Modern Greek tragedy. It is true that, part of the blame is due to the viciousness of our political system. But the same political system, more or less, existed also in the past during the drachma years. In a similar declivity trap, although to a lesser extend, belong Italy, Portugal, Spain, and Ireland  and followed lately by Cyprus. And as shown here, the whole euro zone lies at the bottom of current international growth (Histogram 1). Greece is mow entering the seventh   consecutive year of deep recession. Since 2008, the country’s GNP has dropped more than 27%. During the same period, the Greek Stock Market lost more than 55%of its value. Total funds of 130 billion euro where lost. The average market capitalization for the period 1999-2001 from an average rate of about 140%, lowered to 30% of the GDP in 2014.  The spreads on Greek bonds, also widened alarmingly. Despite extreme austerity measures and the haircut of 1912 (PSI), primarily financed by Greek pension funds agencies and bondholders (Bevan,2012), the central government debt continues to rise. From € 303.5 billion or 157% of   the GDP in 2012, it soared to € 328 billion or about 180% of the GDP by the end 2014. And, according to IMF recent forecasts, it will jump to 196,9% in 2015 and to 206,6%  in 2016. The loans of our lenders have tided the country to a vicious recession spiral and dependency. Official unemployment is about 26% and more than 50% for the young. The risk of poverty for people aged 18-64 years is estimated at 45.8%. ( ELSTAT 2014)[2]. Hundreds of thousand desperate people, mainly young, are flying abroad searching for a job. There is a massive immigration exodus and a massive influx of immigrants,    that alters the country’s labour and ethnic basis. Greece, after 3.000 years of existence, may not exist in the next 50 years. Every year, the Greek government, the European Commission, the    IMF  etc., announce optimistic forecast for the future trends of the Greek economy, that are always refute red in the end. In a special report, the IMF has accepted that it was wrong with its initial predictions concerning mainly the country’s multiplier. (I.M.F.,2013, Spiegel,Harding,R.2013). Yet, the lesson was not learned. New extreme austerity policies have agreed to be implemented by the end o summer 2015. The economy is drying and   inflation moves with a  negative sign, which creates conditions of permanent recession and de-growth. The debts of private loans are increasing dramatically. More than one in two businesses fail to service their loans, tax and insurance obligations. Overall, arrears to the IRS are growing sharply and projected to surpass 100 billion by the end of 2015. More than half of the total of 5.8 million taxpayers owe to the IRS. Continuously expanding is the number of uninsured citizens and entrepreneurs. The pension funds, wounded with the haircut of their reserves from the PSI in 2012, are sinking (Bevan 2012). Their deficits are growing dramatically and this results to continues huge cuts in all kind of pensions. In general, most indicators of the   economy (GDP, unemployment, balance of payments, investments, industrial production and construction, etc), move with a monotonous downward trend. The total economic turnover is declining sharply with no real hopes for a strong adverse course. Basic economics teaches that, in order to increase employment and reduce unemployment, the GDP growth rate per year, should be at levels of about 3-3.5% and above. Moreover, for repayments of the enormous Greek debt, there is a need for an annual growth of more than 2%. So, an overall annual GDP growth of around 5,5% is necessary. The chance for this to happen in the visible   future, is something like a scenario of science fiction. The tragedy has no end. The extreme recession policies, the huge levels of unemployment, the excessive compression of labor rewards and of pensions, are both   inhumane, and uneconomic. They lead to a large drop of domestic demand and to wide social uprising, with tragic economic and social consequences.  Depression creates more depression and lowers the tax base. Mainly due to the overvalued euro, the lack of currency liquidity and high interest rates of loans for business transactions, the country’s poor competitiveness is dying..  Recession cannot be beaten with more recession policies, an overvalued currency and without a generous development plan. (Krougman, 2012).  Loans lead to more loans and dependency – a perpetual cycle.[3] Poverty creates more poverty, misery, hate and upheaval. Over the long term, this is burdensome to all, even for our lenders. These policies are totally wrong, if not mad. They are not the outcome of logic. And common logic is what we need today.

What basic indicators for growth tell us

On the basis of the GDP growth, the euro zone is placed at the bottom of current world economic trends, as shown outstandingly by our histogram presented here. Greece is of course leading the chorus of the catastrophe with an average annual GDP decline of -4,6%, followed by the other so-called GIPSI  countries such as Portugal  (-0,92%), Italy (0,52%), Spain( -0,5%) and Cyprus (-1,68%) as a new entrance in the misery zone. The average annual GDP decline of the GIPSI is -1,06%. The average annual GDP  (AAG) in all the  euro zone[4] during the same period, also shows  a pale  growth of 0,63%. On the contrary, the non euro zone countries AGP growth was 1,27%, a not impressive but considerably better performance. The E.U. countries AAG on the whole, was 1,01% in the same years. The picture internationally outside the E.U. and especially outside the euro zone, is much better. The AAG of all countries internationally including the E.U., was 3,62% and of all  the countries internationally, with the exception of the euro zone, was 4,09%. It is ironic but even Germany, the economic engine and political leader of the euro zone, shows a poor AAG of 1,68%, during the same period. Also disappointing are the cases of the Netherlands ( 0,28%), Finland ( 0,56%),  France (1,04%),  Belgium ( 1,12%)  Austria (1,28%). At the same time, many countries all over the world, pose an AAG of more than 5% and certain others, mostly in the third world, an impressive AAG of more than 7-9%. (Analytical data for GDP growth by country are drown from World Bank, The Global Outlook, 2015). The growth gap between the euro zone countries and the rest of the world, developed and developing, will be continued as valid forecasts are presented in table 1 here.

HISTOGRAM  1

Average Annual Growth of GDP in Greece, the GIPSI, the euro zone and the rest of the world

Source : World Bank, The Global Outlook, 2015. Own  elaboration of  analytical  data of all countries internationally. Latvia and Lithuania have not been included in the above calculations as euro zone countries, because they entered in the euro area in 2014 and 2015 respectively. The so-called GIPSI are Greece, Italy, Portugal, Spain Ireland.

In a variety of ways and with certain differences, most of the faster growing countries, follow a targeted developing strategy, combined with controlled currency devaluations, as a main instrument of their independent monetary policy. They follow the Chinese example of implementing soft monetary policies, in the light of the present currency wars, (Richards 2012, Dilma Rousself 2011[5]), mainly between the dollar, the euro and the yen.  USA, Japan, India, Russia, Brazil, Turkey and almost all developing countries in different time and ways, devalue their currencies in order to recover competitiveness, improve exports and decrease trade deficits. Argentina in particular, after the evacuation of the pesos from the USA dollar and its devaluation in Jan. 2002, has posted impressive rates of economic growth ( Cohen, 2011). These and not only, suggest that despite  leaving the ‘security’ of a fixed exchange rate, the economy can recover after abolishing a currency union ( Cohen, 2011). A nation's exchange rate is said to be the single most important price in its economy; it will influence the entire range of individual prices, imports and exports, and even the level of economic activity (Volcker and Gyohtten 1993).In the hidden currency war of the present days, Greece has surrendered its own currency arm to Berlin, whose main concern is the strengthening of the euro, in an effort to verify the German economic and political supremacy. Yet, Germany and it’s near by euro zone countries, are not doing very well also. It may be argued that, the virus of stagnation from the south invades the north.

                    TABLE 1

                           World Bank Forecasts for Annual Growth of the GDP in selected areas and countries

	2015f	2016f	2017f
REAL GDP1
World	2.8	3.3	3.2
High income	2.0	2.4	2.2
United States	2.7	2.8	2.4
Euro Area	1.5	1.8	1.6
Japan	1.1	1.7	1.2
United Kingdom	2.6	2.6	2.2
Russia	-2.7	0.7	2.5
Developing countries	4.4	5.2	5.4
East Asia and Pacific	6.7	6.7	6.6
China	7.1	7.0	6.9

Blame the euro and not only

The euro, maybe it was a good idea as an optimal currency area theory (Mundell 1961), but in real life it has been a heavy burden. To day, seven years after the beginning of the crisis, the majority of the developed and developing world, have gotten back on their feet. As shown above,only the euro zone stagnates and will continue to do so. A basic question arises. Why the euro-zone countries stand to day at the bottom of the international economic growth?  According to our view, this is mainly due to the overvalued euro without the existence of a fair political umbrella, the strict   monetarist austerity policies imposed by Berlin, the malpractices of the non controlled international markets, combined with the   existence of tax paradises. As proven by professor Steve Keen( Keen 2012)  [6], by the end of the 1980, at an international level, the financial sector surpassed the non financial sector and after that period it rises at a very faster speed. ( Histogram 2). So the non-productive economy, also called the “bubble economy”, overthrows the real economy and   this results to the widening of income differences and to frightening world economic crises. Additionally to that, the application of strict monetarist austerity policies, combined with internal devaluation during such a recession period, have been catastrophic. Deflation increases the real value of private and public debt, raises real interest rates, and cuts consumer consumption. Moreover, when interest rates are near zero, the fiscal multipliers are becoming wide and consequently spending reductions may result in heavy declines in national income

HISTOGRAM  2

Source : Keen,S.(2012). Debuking economics.The naked emperor dethroned. Zed Books

The Greek tragedy revisited

Paul Krugman, (N.Y.Times,17/6/2012) writes that “Fifteen years ago Greece was no paradise, but it wasn’t in crisis either. Then Greece joined the euro, foreign money poured in, the economy boomed, inflation rose; and Greece became increasingly uncompetitive. The Greeks squandered much of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble. And then the bubble burst and the whole euro system became all too apparent. Why does the dollar area — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, which in effect provide automatic bailouts to states that get in trouble. The origins of this disaster lie north, in Brussels, Frankfurt, where officials created a deeply — perhaps fatally — flawed monetary system. And the solution will have to come from the same places. Greece does indeed have a lot of corruption and a lot of tax evasion and the Greek government has had a habit of living beyond its means. Beyond that, Greek labour productivity is low by European standards — about 25 percent below the European Union average. However, that labour productivity in, say, Mississippi is similarly low by American standards. On the other hand, ,the Greeks aren’t lazy — on the contrary, they work longer hours than  anyone else in Europe, and much longer hours than the Germans in particular. (Histogram 3). Nor does Greece have a runaway welfare state, as conservatives like to claim; So how did Greece get into so much trouble? Blame the euro”.

HISTOGRAM 3

Working hours around the world

The euro zone as a currency area is too large and diverse, and the anti-inflation persistence of the European Central Bank (ECB) is too restrictive. (O’Rourke, 2014 ). No fiscal mechanisms exist to transfer resources across regions in the event of shocks that are often created by the gabblers of the international markets. The modern Greek tragedy is not an ordinary recession but a full-blown financial crisis, something which countries usually take a lot longer to recover from.Greece pays the price of an irrational economic experiment. That of the euro zone, an abnormal common currency without the existence of any central political umbrella (Grauve 2010) and combined with strict monetary policies. The architecture and the enforcement of the euro was wrong (Jonung and Drea 2009,Weeks,2013). For sure, this is a costume that does not fit the Greek economy which is based on tourism and agriculture, that require a labour-intensive production process. Labour costs can not be compressed below a certain level so that the total production costs will be lower or equal to that of our competitors. This can be seen empirically - the room in a Greek hotel costs about twice its counterpart in Turkey, Egypt, Bulgaria, Romania, Hungary and not only. Furthermore, our oranges,  lemons, peaches, cherries, olives are falling from our trees and are rotting. These products are substituted by cheaper imports from faraway Argentina, Morocco, Egypt, etc.  Thus, the Greek economy suffers from not competitive prices. Add to that, the high   interests rates that Greek enterprises pay, as well as several other burdens such as for example, the very high cost of fertilizers produced by oligopoly companies in north with relevant consequence for agricultural production costs. Imported Greek armaments from the west in the last   thirteen  years, cost more than  100 billion euros, a sum very near  to our original deficit. Turkey, a candidate for entering the E.U., direct blatant threats to Greece’s and Cyprus’s territorial integrity and obliges us to spend on armaments the largest portion of GNP. internationally after the U.S.A. On the other hand, the hard euro fits relatively better with the northern European countries, which produce oligopoly products of capital intensive and innovative high-end technology. The cost of these products can be compressed significantly and profit margins may be huge. This permits the northern countries to accumulate large foreign exchange surpluses and speculate on the also huge difference of spreads. Yet, the strength of the  north, is not enough to keep alive the whole euro-zone. And the ship is, or will be singing all together. The euro-zone passing fast through a period of youth of stagnation is already very old, tired and miserable to combat in the international economic race of to-morrow. (Krauss 2011).

What we do

There is a growing feeling that, the European Union must rediscover the deposits of its aspirators and become a real union of prosperity, piece, convergence and solidarity, as federal political entity without a single currency (Saratrin 2012, Van Overleldt 2012). A structured abolishment of the euro will require capital controls, defaults in several countries, measures to deal with the ensuing financial crisis and negotiations about debt payments. A looser monetary policy with proper fiscal policy is also needed. The European Central Bank must move towards growth than restrictive policy and set an inflation target above 2%,  in order to facilitate real exchange rate adjustment and promote the solvency of its member states. In the case of Greece, the carefully structured exit from the hard euro, permanent or temporary (Sin,2012),  is the only road for a  new beginning, a needed  step before the abyss. This should be accompanied with a controlled bankruptcy, a generous cut of debts and a large extension of their repayment period. As a next step, the new drachma will be deflated initially at 25-30% as a necessary precondition for regaining the lost competitiveness of the Greek economy. In order to avoid hyperinflation, the amount of currency circulation should be controlled   properly. Government restriction spending, modernizing public administration, combating corruption, impunity, bureaucracy and reducing tax evasion is necessary, as well as the strengthening of  productive investments, the protection of the poor and of the social welfare are also needed.  Low and medium wages and salaries and pensions, should be increased eventually at a moderate level and in accordance with the shift towards internal consumption, so as to avoid the sudden hiting of the economy. In the initial period that may last no more than one year, the Government must take care for the provision of basic commodities, especially food, medicine, fuel, etc., control trade malpractices and the black market.  In any case, we must be cleared from the pathetic syndrome of the “import country”, reactivate our production basis and try to consume no more than we produce. Ideally and beyond the narrow vision of the Greek case,   it is time to consider the abolishment  of the international tax paradises and of  uncontrolled free capital flows, introduce the separation between trade and investment banks, create a new Marshall development plan for countries in need, raise the real productive economy over the “bubble” economy of the uncontrolled international markets and promote a new humanitarian vision of the economy and society.

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[1] The author  is a professor of economics at the University of Piraeus, Greece, Ph.D ( L.S.E.), M.A. (Warwick)

[2] ELSTAT is the Official Greek National Statistical Authority

[3] Menandros an ancient Greek philosopher has said that ,”loans make slaves the human beings”.

[4] The EU consists of 28 member countries and the euro zone of 19 countries noted by bold letters in the following list, where the first number indicates the year of entrance to the E.U. and the second, where it applies, the year of entrance to the eurozone : Austria (1995,1999), Belgium,1958,1999,Bulgaria,2007, Cyprus,2004,2008, Czech Republic,2004,Denmark,1973,Estonia, 2004, 2011,Finland,1995,1999,France,1958,1999,Germany1958,1999,Greece,1981, 002Hungary,2004,Ireland,1973,1999,Italy,1958,1999,Latvia,2004,2014,

Lithuania,2004,2015,Luxembourg,1958,1999,Malta,2004,2008,

The Netherlands,1958,1999,Poland,2004,Portugal,1986,1999,Romania,2007

Slovakia,2004,2009Slovenia,2004,2007,Spain,1986,1999

Sweden,1995,United Kingdom,1973

[5] Dilma Vana Rousseff  is a Brazilian economist, now President of Brazil from Jan. 2011

[6] Steven Keen is a well known Australian neokeynsian economist that argues about similar matters,