There has been much unscientific economic pronouncements about Greece’s financial problems and especially how to solve them. Below is a short list of three of these economic fallacies.
This statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.
Well, there is a semester’s worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can do so. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold standard, national currencies were defined by their exchange rates to gold and were redeemable in specie; therefore, in effect, all countries were using the same currency– gold.
Correlated to the above fallacy is the notion that debasing the currency will aid the Greek economy by the stimulative effects of an increase in exports. The idea is that the Greeks can give more drachma for the currency of its trading partners, making Greek exports cheaper in terms of the foreign currency. Increased exports will stimulate the entire economy. But currency debasement merely causes a transfer of wealth within the monopolized currency zone. The Cantillon Effect tells us that the early receivers of the newly printed money benefit by their ability to purchase resources at existing prices. The losers are those furthest removed from the initial increase in spending, such as pensioners. They will find that their money doesn’t buy as much, due to price increases that are an inevitable consequence of an increase in money spending. Eventually the exporters find that the cost of their resources has risen, at which point they demand another round of money debasement in order to prop up foreign sales and avoid business losses. They will be forced to pay more for their factors of production and must raise prices in local currency terms. In order to avoid losing sales they need their foreign buyers to receive more local currency so that their goods do not increase in price in foreign currency terms. This policy masks real structural problems. It is not a currency problem.
In other words, debasing the currency is a way avoid the dreaded austerity monster. Governments would have the people believe that there are sufficient real resources to redistribute from the wealthy to alleviate all poverty. It is assumed that the wealthy have nefariously confiscated the people’s wealth, and redistributing it along socialist lines will result in plenty for all. The socialist “plenty for all” slogan has been around a long time and has yet to prove its worth in alleviating poverty.
The Greeks (and Europe) Need Monetary Freedom
In conclusion, too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. The Greek government has borrowed more money than the Greek people can possibly repay. Debased money will not make this fact disappear and, on the contrary, will cause even more harm. It is telling that in poll after poll the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro. They know that such a move will allow the government to destroy what little wealth remains in the country. The Greeks see the euro, with all its flaws, to be superior to a reinstated drachma. The best alternative for Greece right now is to abolish legal tender laws, which would allow the Greek people to trade in whatever currencies they deem most desirable. The Greek government may be forced to default on its euro loans. It is hard to imagine what good can come from another bailout just as it is hard to imagine what good can come from harnessing the Greek people to the yoke of high taxes. The Greek government itself responded rationally to the structure of the European Union and the European Monetary Union. It borrowed heavily at low rates of interest from willing lenders. It accepted all the newly printed euros so eagerly offered by these flawed organizations’ various funds. It is not the only country to do so, merely the first in which the adverse consequences of the EU’s flawed structure became apparent. There will be others and the adverse consequences will be greater. What is important now is that Europe stop destroying its capital base in pursuit of a socialist dream that has become a nightmare.
An excerpt from today’s Open Europe news summary:
Luc Coene, a member of the ECB’s supervisory board and a former Belgian Central Bank Governor, told Belgian daily De Tijd that a Grexit may have been a better option, arguing, “Because of the depreciation of the currency, one can achieve more through increased exports in a less painful manner.”
From today’s Open Europe news summary:
William Hague: Greek crisis could be only the beginning
Writing in The Daily Telegraph, former UK Foreign Secretary William Hague argues that “this is not just about one country. It is in Greece that the fundamental tensions created by a single currency have first broken through, because Greece is a particularly indebted and less competitive country. But the same tensions will ultimately surface in other nations facing a less immediate crisis but a similar prognosis.” He adds, “There is a clear risk that the economic performance of the south will diverge from, not converge with, the north. Unless this is averted in the coming years, it will bring problems to Europe for which Greece has only been a minor rehearsal.” His comments resonate with an op-ed written by Open Europe Co-Director Stephen Booth for The Daily Telegraph last week, in which he argues that the Greek crisis shows the need to redefine ‘ever closer union.’
Open Europe’s experts have been widely cited in the UK and international media discussing the latest developments in the Greek crisis. Writing for The Daily Telegraph, Open Europe Co-Director Raoul Ruparel argues that “The negotiations may rumble on for a bit but the gaps between Greece and creditors as well as within the creditors look too large to bridge. Ultimately, if Greece ever wants to reopen its banks it will have to start printing its own currency, marking an important step towards full Grexit.” Raoul also appeared on BBC Radio Four’s Today programme and on BBC Radio Two’s Jeremy Vine Show arguing that it will be very hard for Greece to avoid leaving the Euro now, since its demands remain incompatible with the political situation and democratic mandates of most other Eurozone governments. Raoul is also quoted by the International New York Times and El País. Open Europe’s Co-Director Stephen Booth is quoted by Die Welt arguing that Grexit would reinforce David Cameron’s argument in favour of a more flexible EU.
These are very flawed institutions. In his prescient book Tragedy of the Euro, Professor Philip Bagus uses the term “misconstructed”, which I think is very descriptive of the EU and the EMU. There is nothing that the European Union can offer any member that it cannot grant to itself by adopting unilateral free trade. EU economic regulations are systematically destroying what little remains of free market capitalism in Europe. The Euro is a fiat currency without any real political protection. All members can abandon the euro at any time, which would relegate the euro’s purchasing power to that of the Zimbabwean dollar…in other words, worthless. Greece is running out of euros, which is causing the Greek economy to come to a standstill. Staying in the EU and the EMU will perpetuate Greece’s loss of sovereignty. Leaving will force the Greeks to rely upon themselves. It very well may end the Greek welfare state, because it will become clear that the welfare state is at the heart of Greece’s financial problems.
Allow Greeks to use whatever money they find useful. Do not reinstate the drachma. Forcing a people to use one currency is a form of tyranny, because whoever controls the currency controls the economy, and whoever controls the economy controls the people. Freeing the Greeks to use whatever currency they find useful will immediately get the economy moving back to some form of stability.
Greece needs free market capitalism. Business and labor regulations are the means to enforce the socialist welfare state’s predations upon the people. All Greece needs is enforcement of normal criminal and commercial law to prosecute theft, fraud, negligence, etc. These concepts are the result of the common law and can be different in different countries.
These agencies are nothing more than predators upon the people. They do not contribute to the capital wealth of the nation, but destroy it instead. Obviously, scrapping all of these unnecessary and counterproductive agencies will go a long way to solving Greece’s budget deficits by shedding their unnecessary yet highly paid bureaucrats.
This is a crucial part of becoming a free trade nation. Allow outside capital to invest in Greece and give such investment maximum legal protection. Above all resist the temptation to nationalize or heavily tax foreign investment once it become clear that such investment is productive and profitable.
The sole purpose of the state is to provide such protection to its citizens and to provide an honest court system to punish criminals and resolve honest disputes. Extend such protection to foreigners and foreign investments. Again, shrinking government to these essential services will help cure the budget deficit.
It may be inhumane to eliminate all old age pensions in one swift repeal, but the government should adopt policies that will end the provision of state pensions entirely over time. In his magnum opus Capitalism: A Treatise on Economics, Professor George Reisman presents one such method to eliminate Social Security in America. This method could become a template for Greece.