The fundamental flaw of joining disparate economies at varying levels of accomplishment and financial stability under a single currency is the inability to use the currency itself to reflect value differences. English please. OK, if you have an underperforming, debt-ridden country with the same currency as a wealthy exporter – that would be Greece vs. Germany – both using the same currency… and instability kicks in, what can you do? The German currency cannot rise against the debt-ridden Greek denomination when they are both using Euros. You cannot inflate Greek Euros against German Euros… Euros are simply always equal. Duh-oh!
So how do you reflect the demise of the Greek economy when compared to fellow Euro currency nations like France and Germany, where economic stability is clearly more evident? You shove the economy in Greece downwards by lowering wages, decreasing social benefits and demanding severe austerity whereby the Greek government agrees to shed substantial civil servants and governmental largesse simply to stop the hemorrhaging of governmental spending that is totally borrowed… at least 300,000 government workers. That really cannot make the local populace happy. Their expectations, retirement benefits, medical coverage, safety net, government programs and even job security are subject to severe reductions and contractions. Maybe you hold a referendum to ask the people if they are willing to make the sacrifice… or instead simply default on all that debt they have accumulated.
Now if you had two separate currencies, say a Euro for Germany and the old drachma for Greece, what could you do? Hmmmm…. Well, if the debt were transferred into drachmas instead of Euros, and instead of defaulting (or even if it defaulted), the Greek government simply paid off the debt by printing more money, that debt would go away pretty quickly. But then again, inflation would accelerate to such a level that it might take a suitcase to buy a glass of ouzo. Wages wouldn’t fall in number denomination, but buying power would plunge like a stone. And Greek goods and services, paid in drachmas which were devalued vis-à-vis the stable currencies of the world, would fall in price dramatically when measured in more stable dollars or Euros. Which might mean Greece would export more… and by exporting more begin to resuscitate an otherwise moribund economy.
Sure, there would be lots of severe displacement as folks got used to the new currency values, and folks on fixed incomes or reliant on government benefits would have to find support somewhere else in the system. It is this exceptionally painful transitional period that has every one quaking in their tattered boots. Really, really painful! This is like the famous inflationary surge for which Argentina and other Latin American nations have been so famous in the past. After soaring inflation (in the 1980s (the annual inflation rate hit as high as 350%!), the Argentine government took their currency off the dollar standard in 2002 and defaulted on their sovereign debt. Salaries remained the same after this move, and as result the balance of payments shifted dramatically; people simply could not afford to buy imported products of any kind. Unemployment skyrocketed to 25%. People turned to scavenging and bartering.
The inflationist.com summarizes the turn of events:
- Collapse of currency resulted in barter networks.
- 2003: 25% unemployment. Thousands of homeless and jobless Argentines found work as cartoneros, or cardboard collectors. Estimated 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants.
- Agriculture affected: argentine products rejected by international markets for fear they might arrive damaged from the poor conditions they grew in. USDA placed restrictions on Argentine food and drugs.
- Tourism gradually improved with devalued currency
The recovery
- Early 2003: economic outlook was completely different from that of the 1990s; the devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports.
- high soy price produced massive surplus - China major buyer of Argentine soy products
- aggressive improvement in tax collection
- huge trade surplus resulted in revaluation of pesos - government intervened to keep it from revaluing further (The central bank started buying dollars in the local market and stocking them as reserves - the downside is inflation as buying USD required freshly printed pesos)
- Dec 2005: $28 billion USD
- January 2006: complete upfront payment of IMF loan.
Could this scenario apply to Greece? Certainly, if the Greek electorate were to reject the settlement with the banks which the world thought had been worked out by France and Germany, on the one hand, and Greece and her lenders, on the other. “‘The real problem is that we are operating under a foreign currency,’ Vasilis Serafeimakis, a senior executive at Avinoil, one of Greece’s largest oil and gas distribution companies, said of the euro. In the last year, he has been banging the bring-back-the-drachma drum.” New York Times, November 1st. But polls suggest that 2/3 of the Greek population does not want to leave the Euro nations and reinstate the dreaded drachma. On the other hand, since Greece has joined the Euro nations, its competitiveness has declined by 30%, and were currency devaluation possible, this anomaly would be fixed automatically.
“Prime Minister George A. Papandreou threw down the gauntlet to the Greek people [October 31st] when he surprised the world by announcing a referendum on the latest bailout plan. But it was his finance minister, Evangelos Venizelos, who that same day put a finer point on the question… ‘Are we for Europe, the euro zone and the euro?’ he asked. Or, he continued, does Greece return to the drachma?
“Under the latest bailout plan from Europe, Greek debt held by private institutions would be written down by 50 percent. In return, as long as Greece stayed on track carrying out painful austerity measures through 2015, Athens would continue to receive more bailout money to finance its remaining debt… When Mr. Papandreou brought that tentative deal back from Brussels [in late October], the escalated protests and rioting on Greek streets were a sign that it was not something his people would easily stand for.” NY Times. Oooops… hey, let’s try and undo this retroactively or at least let the people think they voted for disaster on their own.
But the European mainstays made it clear that there would be no interim relief for Greece until the results of the referendum were known and then only if the people voted for the EU deal. Yeah, right. Wanna know what the financial markets thought about this move? A 297 point fall of the Dow on the day after the announcement says it all. Oooops, folks actually looked at the ramifications of the proposed Greek referendum no matter the result. Oooops, referendum cancelled!
What’s the postscript to all this chaos? “Greece’s two main political parties reached an agreement [November 6th] to form a unity government, giving Europe a steadier partner as it works to avert a larger financial crisis on the continent. Prime Minister George Papandreou will resign after the new government is formed, officials said, although the timing, and his successor, remained unclear.” Washington Post, November 6th. Life goes on as the next crisis looms. Did I mention that Italy is not too far behind? Oh, except Greece has only about 11 million people, and Italy is the eighth largest economy on earth with almost 60 million people. Oooops…. Again!
I’m Peter Dekom, and I am simply wondering who is going to make the bad man stop?!
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