Home > Uncategorized > Greece will have to leave the Euro and tax liquid wealth, not spending and income.

Greece will have to leave the Euro and tax liquid wealth, not spending and income.

Update: Yannis Varoufakis about the Syriza mandate (and Grexit is not a legal option). Too bad that Jeroen Dijsselbloem doesn’t even try to be his intellectual opponent.

Mario Draghi, president of the European Central Bank and a natural born winner, lost.

It is a bitter loss.The Euro project as it was supposed to be is in tatters. The Euro turns out to be reversible. Since the introduction of the Euro macro economic volatility in the Eurozone increased, growth declined, unemployment reached levels not seen for seventy years and banks have still not been properly regulated. Also, Eurozone wide income transfers (pensions, unemployment benefits, deposit guarantees), which are needed for social reasons as well as to stabilize the Euro and the economy, are a more distant dream than ever. Reckless private money creation of the Irish/Dutch/Baltic type still can happen anywhere at any moment. And grotesque imbalances persist: the Dutch current account surplus is, at the moment of writing, supposed to be 13% of GDP. or 21 billion Euro in the first quarter of 2015.The Euro was designed to decrease national differences and to curtail governments by invoking market discipline. The opposite happened (but democracy was curtailed). Read all about it: Wynne Godley, in 1992 (!):

I am driven to the conclusion that such a view – that economies are self-righting organisms which never under any circumstances need management at all – did indeed determine the way in which the Maastricht Treaty was framed. It is a crude and extreme version of the view which for some time now has constituted Europe’s conventional wisdom (though not that of the US or Japan) that governments are unable, and therefore should not try, to achieve any of the traditional goals of economic policy, such as growth and full employment. All that can legitimately be done, according to this view, is to control the money supply and balance the budget. It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe.

But there is much more to it all. It needs to be emphasised at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues. As Mr Tim Congdon has argued very cogently, the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony. Local authorities and regions obviously cannot devalue. But they also lose the power to finance deficits through money creation while other methods of raising finance are subject to central regulation. Nor can they change interest rates. As local authorities possess none of the instruments of macro-economic policy, their political choice is confined to relatively minor matters of emphasis – a bit more education here, a bit less infrastructure there. I think that when Jacques Delors lays new emphasis on the principle of ‘subsidiarity’, he is really only telling us we will be allowed to make decisions about a larger number of relatively unimportant matters than we might previously have supposed. Perhaps he will let us have curly cucumbers after all. Big deal!

Let me express a different view

The reader has to consult the Godley essay for this different view. Also, ook here for the proposals of The Institutions to dismantle democracy in the Euro Area: Godley told us so. And mind that when Tsipras decided to have a referendum (About what exactly? Is it possible to organize this in one week?)  the Greek negotiators were engaged in negotiations about VAT rates in hotels. Not exactly curly cucumbers – but clearly something which should not decided in Brussels.But these arediversions. The important question is:

Marion Draghi lost. But did anybody gain?

At this moment: no. And there will be very large losses further dow the road – not just because of the Tsipras decision (look also here) but because of the design of the Euro area in combination with ridiculous bureaucratic brinkmanship, which led to this present situation. In case of Grexit the Euro is irreparably compromised (this is the case already, in fact). If Greece keeps the Euro – well, I have no idea how that can be the case and what will happen. But Paul Krugman is right. The damage to Greece has already be done. The price paid by the Greek for the Euro has been too high. Neither unemployment nor government debts (as a % of GDP) has, in the post-war history of Greece, either been close to present day levels, despite earlier episodes of government debt spurred growth. The only thing they can do is to take their destiny out of the Brussel bureaucrats’ talons and into their own hand – from Sysyphus to Hercules. This will require a very hefty wealth tax (including savings deposits and wealth channeled to Switzerland). But governments have a responsibility to keep the flow of spending, income and production going, even if this requires taxing away wealth and nixing debts. .

On February 16 I published a blogpost ‘Chronicle of a Grexit foretold‘, the title (and substance) of course inspired by the Gabriel Garcia Marquez story ‘Chronicle of a death foretold’) in which I compared the ‘game theoretic’ of the Greek negotiations to the situation described in this novella. Quote:

Schauble clearly is ‘the other man’. The man who, as for many reasons none of all these clear messages reached him,  did not change his routine despite the obvious risk and may soon have as his most important accomplishment that he forced the Greek to knife the Euro – as this will be their only way left way to a brighter or at least more dignified future.

The end of the Marquez novella is even more unbelievable than the killing. And might show the way ahead.”

 

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  1. June 28, 2015 at 6:27 pm

    Interesting article. Be interesting to see what happens over the coming days. At the moment the EU are making lots of noise of keeping Greece in the euro even though they will default. Can’t see how both are possible, as you suggest.

    I have written about the moral hazard implications of a ‘Grexit’ on my blog also :) Don’t know if it’s of any interest, but thought I’d post a link.

    https://anoneconomist.wordpress.com/2015/06/27/austerity-for-a-lifetime-game-theory-and-moral-hazard-on-a-greek-default/

  2. Blissex
    June 30, 2015 at 5:17 pm

    «The price paid by the Greek for the Euro has been too high. Neither unemployment nor government debts (as a % of GDP) has, in the post-war history of Greece, either been close to present day levels, despite earlier episodes of government debt spurred growth.»

    Earlier episodes have not been as extreme, as the debt has not also been as extreme. In part this is the fault of the creditor governments that granted AAA status to any EU sovereign debt to provide vendor financing to anybody government knavish enough to take it.

    «The only thing they can do is to take their destiny out of the Brussel bureaucrats’ talons and into their own hand – from Sysyphus to Hercules.»

    Greek citizens probably trust the Brussels clique a lot more than their politicians. That’s why they are perhaps going to vote “yes”.

    «This will require a very hefty wealth tax»

    Why haven’t Tsipras and his predecessors already done it? Because they want to be re-elected…

    «(including savings deposits»

    This is sort of happening.

    «and wealth channeled to Switzerland).»

    That’s entirely unrealistic, because of politics and complicity and objective difficulty.

    «But governments have a responsibility to keep the flow of spending, income and production going,»

    The problem with Greece is *imports*. What level of GDP is compatible with a balanced current account? Probably the current one or lower.

    «even if this requires taxing away wealth and nixing debts.»

    Good luck with doing an Argentina! As Varoufakis said that means in the end a firesale of greek assets to the rich greeks who pilfered lots of borrowed money from the state and, knowing how the game was likely to end, made it disappear abroad.

  3. June 30, 2015 at 7:32 pm

    Land value tax is a great way to ensure demand for the currency.
    Greece should:
    1. Introduce land value tax in drachmas taxing the “location, location, location.”
    2. Introduce Job Guarantee to help ensure full employment and price stability.
    3. Spend on housing, infrastructure, health, etc.
    4. Regulate banks properly and ban bank lending to short drachmas.
    5. Ban luxury imports and ensures imports are only what Greeks *need.* Introduce rationing if possible.

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