Abstract
In this paper, we support that, mainly Greece and to a lesser degree, the European south is the victim 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 eurozone, together with the malpractices of the international markets, are mainly to blame. The imposition of an optimal currency area such as the eurozone 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 by a controlled bankruptcy, generous cuts of debts, and an 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 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 bearing 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 eurozone lies at the
bottom of current international growth (Histogram 1). Greece is now
entering the seventh consecutive year of a 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 were 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 of 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 thousands of desperate
people, mainly young, are flying abroad searching for a job. There are a massive immigration exodus
and a massive influx of immigrants, that
alters the country’s labor 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 forecasts for the future trends of the Greek
economy, that 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 a 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 continuous huge cuts in
all kinds of pensions. In general, most indicators of the economy (GDP, unemployment, the 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 annual growth of
more than 2%. So, the 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 in domestic demand and too a 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 eurozone 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 noneuro 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 eurozone 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 eurozone, was 4,09%. It is ironic but even Germany, the economic engine and political leader of the eurozone, 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 drawn from the World Bank, The Global Outlook, 2015). The growth gap between the eurozone 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 eurozone, 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 eurozone
countries, because they entered 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 the 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 eurozone 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. Today, 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 eurozone stagnates and
will continue to do so. A basic question arises. Why the euro-zone countries
stand today at the bottom of 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 1980, at
an international level, the financial sector surpassed the non-financial sector
and after that period it rises at a very faster speed. So the
non-productive economy, also called the “bubble economy”, overthrows the real
economy, and this results in the widening of income
differences and too frightening world economic crises. Additionally, 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 widespread, and consequently, spending reductions
may result in heavy declines in national income
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 provides 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 labor
productivity is low by European standards — about 25 percent below the European
Union average. However, that labor 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 2). 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 2
Working hours around the world
The eurozone 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 eurozone, 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 were 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 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. 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-interest 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 the north with relevant
consequences 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 altogether. The euro-zone
passing fast through a period of the 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, peace, convergence, and solidarity, as a 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 by 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 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 heating of the economy. In the initial period that may last no more than one year, the Government must take
care of 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 the 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] Malandros an ancient Greek philosopher has said that” loans
make slaves 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 neo Keynesian economist that argues about similar matters,
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