Home > Uncategorized > Greece needs an exit option

Greece needs an exit option

from Dean Baker

Every fan of the market knows the importance of exit. If your breakfast cereal is too bland, you can buy a different brand of cereal. If your barber charges too much, you can look for a new barber who will charge less. The option to leave is crucial since it forces the cereal producer and the barber to try to please their customers in order to keep them.

The same logic applies to Greece’s position in the euro. The country’s newly elected Syriza-led government intends to press the European Union (EU) for concessions that will allow it to restart its economy. The policies that have been imposed by the EU on Greece since the crisis could win a Nobel Prize for economic mismanagement.

Since the pre-recession peak in 2007, the Greek economy has contracted by more than 23 percent. By comparison, in the Great Depression the U.S. economy bottomed out in 1933 at 26 percent below the 1929 GDP level. However the next year the economy grew by 10 percent and by 1936 it had already made back all the ground it lost. If Greece sustains its 2014 growth rate it will return to its 2007 level of output just before 2050. If the U.S. economy had taken the same hit as Greece, GDP would be lower by more than $4 trillion, implying a loss of annual output of more than $13,000 per person.

The plunge in output corresponds to a plunge in employment. The overall unemployment rate is more than 25 percent, with the youth unemployment rate above 50 percent. If the United States saw a decline in employment comparable to what Greece has endured, nearly 30 million fewer people would be working.

This economic collapse has had predictable consequences for the Greek population. Formerly middle-class people can no longer afford basic health care. Many are facing the loss of their house or apartment or are already homeless. Some scavenge garbage cans for food.

This is the backdrop of Syriza’s election victory. The party promised an end to the disastrous policies being imposed by the EU and a return to economic growth. However the EU, led by Germany, is not likely to reverse course. As far as they are concerned, everything is fine. Their first priority is forcing Greece to run large primary budget surpluses in order to meet interest payments on its debt. The consequences of this policy for the Greek people is of little concern; they want the Greeks to pay their bills.

This is where the exit option becomes important. As one of the smaller, less powerful countries in the EU, Greece stands little chance of being able to force a change in policy on its own. This means that it has to have a viable exit option, both because it may actually want to go this route and also because it needs greater bargaining power with the EU.

There is no doubt that an exit from the EU will initially lead to enormous disruption to Greece’s economy. Returning to the drachma would not only be associated with a default on government debt, but many private businesses and individuals would also be unable to meet debt payments denominated in euros. But other countries have worked through a similar adjustment, often with remarkable results.

Argentina, for example, broke a tie between its currency and the dollar in 2001. Although there was an immediate period of chaos and sharp economic decline, three years later its economy was 17.2 percent larger than before the devaluation. The countries of East Asia had similar sharp turnarounds following the 1997 East Asian financial crisis, as have several other countries.

There is no guarantee that Greece will be as successful with a return to the drachma, but there are reasons for optimism. First and foremost, the country now has both a primary budget surplus and a trade surplus. The primary budget refers to the national budget without counting interest payments. Greece is now running a primary budget surplus of more than 3 percent of GDP (the equivalent of $500 billion a year in U.S. GDP). This means that if it didn’t have to pay interest on its debt, it would not need to borrow to make ends meet.

Since Greece has a trade surplus, it already doesn’t need to borrow to finance essential imports. (The recent plunge in oil prices could save Greece $9 billion a year, or close to 4 percent of GDP.) The drop in the drachma relative to the euro will further improve its trade position, leading to a boost in net exports and a sharp upturn in employment. It is certainly plausible that Greece’s economy will in very short order make up the ground lost to an initial period of instability and then continue on a path of robust growth.

This is where the EU has inadvertently done Greece a favor. It has damaged Greece’s economy and society so severely that the disruptions caused by leaving the euro are likely to seem minor by comparison.

Of course Greece would be far better off retaining the euro and negotiating a budget that allows it to resume growth, but it is far more likely to get the necessary concessions if it also has an exit strategy. Germany and other northern countries are concerned that a successful Greek exit could set an example for other countries facing crisis, such as Spain, Portugal and Italy. The end result would be a rump euro of Germany and a few small neighbors.

But this outcome can be avoided if Greece has a good exit strategy on the table. Just as the threat of changing brands can lead cereal producers to offer a better breakfast cereal, the threat of Greek exit can force the EU’s leaders to become better policymakers.

View article at original source.

  1. graccibros
    February 5, 2015 at 1:21 pm

    I believe Dean has it right. The initial reaction of the Troika and especially Germany itself gives the Greek negotiators no room and no hope. One hopes that their gifted Finance Minister Yanis Varoufakis, has had a well thought out exit strategy all along, despite his expressed desire to stay. A good game theorist would do that, right?

    Dean mentions the large oil payments Greece makes, and the breaks they have been getting from the price drop. But this startling dependency also points the way for Green jobs, public ones, as in the American WPA and CCC (which is what the Varoufrakis, Galbraith, Holland “Modest Proposal” is based on: the New Deal) to get off imported oil and use their sunshine, wind and water resources to “exit” fossil fuels as completely as possible. Their island geography and demography also means that alternative energy makes a lot of sense, de-centralized and publicly owned as far as possible. Greece used to have a larger than “modern” agricultural sector – and of course “professional” economic advice said phase it out, it’s a sign of backwardness. The old farmers can all work in tourism and…and…and…well, let the market figure it out. Maybe that wasn’t the right course if they must leave. Does anyone see a manufacturing future given Asian realities and the Eastern Europe quite able to fill in for whatever Asia does not? I don’t…so Greece is going to have to face the “Roubini” truth of a glut of labor and capital – with the later not coming to Greece anytime soon unless they can see the new green energy field as viable. I would express the labor side of Roubini’s observation a bit differently: so many new people have been brought into the world economy over the past ten years and automation is there as a great pressure, women in the workforce to stay as well…all the higher manufacturing “efficiencies” means that we have a lot more people who really are not needed, which is cruel, brutal news but there it is, a truth that ruthless analytic MIT Harvard MBA’s in the meritocracy-American Dream stream won’t ever face and certainly won’t ever tell the public. But there it is…I think MMT’ers can best deal with this, but they’re not coming to power anytime soon. And the other flank on the left, the Gar Alperovitz built it up co-operatively from the bottom, out of sight, out of sound, may hold some promise but also is years away and doesn’t seem to me to be able to deliver work and pay for many in the short and medium term crunch…which is where most people facing bills and debt live…esp. the Greeks. And maybe soon the Spaniards.

    Nice to see Yves Smith discover Karl Polanyi, (she’s given a number of spaces to Yanis Varoufakis over the past two years by the way) and I’m still recommending him and his analysis, The Great Transformation. Fred Block and Margaret Somers have a 2014 book out, “The Power of Market Fundamentalism: Karl Polanyi’s Critique,” and I recommend it. The American legislative “stalemate” and the German-Troika defense of neoliberalism looks more and more like the gridlock and disaster Polanyi describes for democratic legislative bodies in the 1920’s and 1930’s which led to you know what in Europe, and that’s clearly been in Varoufakis’ analysis as well.

    Good luck to us all. We don’t have the “Gold Standard” anymore, thank goodness, but neoliberalism has its own fiscal straightjackets, doesn’t it, and they’re doing just as well to choke democracy.

    • Marko
      February 5, 2015 at 10:15 pm

      Robert Johnson of INET interviews Fred Block about the book , ” The Power of Market Fundamentalism” :

      • graccibros
        February 5, 2015 at 11:13 pm

        Thanks Marko. I think Fred Block comes across more forcefully in print than in this media forum. It takes me back to the J.K. Galbraith Milton Friedman struggles in the 1970’s over Galbraith’s PBS series. Which Friedman won on style and …”will to power.”

      • Marko
        February 6, 2015 at 3:31 am

        Agreed. I’m glad James Galbraith Jr. is only an advisor to Greece. He’s like his dad in his speaking style.

        Varoufakis vs. Friedman would have made for a very entertaining debate , however.

  2. February 5, 2015 at 1:45 pm

    What will stop Greece from realizing that traditional agriculture produces close to twice per hectare as corporate industrial agriculture. Has this figure changed? I’ve seen pictures of Greek farm country, it looks as empty of people as California, except for migrant semi slave labor.

    I can imagine Mr. Varoufakis’ can see that corporate agriculture’s externalized costs and relative inefficiency present a huge untapped capital source which could be used to convert youth unemployment to a modern form of traditional entrepreneurial agriculture.

    • graccibros
      February 5, 2015 at 1:57 pm

      Lot’s of homegrown “Greek Yogurt,” Garrett?

      • February 5, 2015 at 2:48 pm

        Yep. Value added and increased shelf life can be quite a boost for smaller traditional agriculture.

        Robert Kennedy, Jr has an interesting point about sewage investment and the resulting price of pork; he uses a hypothetical figure of $75 per pound for pork if the pigs of Iowa were required to be as decent with their effluence as the humans of New York, who have built 17 billion dollars with of sewer treatment plants.

        There is quite a bit of room in this price for a young couple to compete in business and establish their own family, even if their degrees are in a different but unemployed field.

  3. Macrocompassion
    February 5, 2015 at 5:17 pm

    Greece should introduce the New Drachma as well as continuing to use the Euro as at present. The new form of currency should be convertible with the Euro, but not be allowed for use in investment, loans to/from banks, or foreign trade. It should find use domestically, between households, producers, landlords and the government, after it is released by the Greek government (via their Treasury). The New Drachma is to find use in paying for employment, in the improvement of national programs to raise the quality of the infrastructure at large. If land values were taxed at the same time (because otherwise their values will rise due to the improvements to the infrastructure noted above) and other taxes reduced, in combination with this, then the Euro could be gradually paid back as banks and government would slowly accumulate them.

    • Helge Nome
      February 5, 2015 at 8:41 pm

      Competition between currencies. Way to go. Give that fake Euro a run for its “money” ! : )

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