The referendum question put to the Greek people on Sunday 5th July 2015 was patently absurd. Not only was its premise obfuscated by language exclusively suitable for economists, but the question put to Greeks had, in effect, expired: the offer was no longer on the table.
Amidst the impasse, a more courageous and perspicuous question should have been put forward. That is, the Greek people should have been asked whether their country should stay in or leave the Euro. There are suggestions, of course, that this was the real question simmering gently beneath the surface of all that economics jargon.
The chances are that the answer to this question would have been no. Greeks are overwhelming in favour of the European project. A Grexit would likely have been seen as too risky: a step towards economic and political isolation.
But as things stand the Greeks may have no choice.
They have rejected the expired proposals put forward by their creditors, courtesy of a no vote in the aforementioned referendum. Whilst Syriza view this as a democratic mandate to negotiate a better deal, their creditors are likely to see this as a vote to leave the Euro – not negotiating leverage.
Perhaps more pertinently, liquidity is drying up. The European Central Bank (ECB) has capped its Emergency Liquidity Assistance (ELA) and the Greek banking system is in shutdown. Many cash points are empty and panic is ensuing amongst Greek citizens.
The personal stakes are also getting higher. You do not have to look much further than the picture that circulated the internet last week of a pensioner crying outside a closed Greek bank.
There is no question: Greece was fiscally profligate in good times and is in stark need of structural reform. But the situation has now crossed a line. The Greeks are an example for their European creditors. Alas, the result is harsh and humiliating.
More to the point, the reforms pressed upon them in previous rounds of bail-out agreements have failed to aid economic recovery. Across a period where the Greek economy should and could have convalesced, its people have instead been faced with unprecedented and sustained levels of unemployment. General unemployment has endured at levels above the 25% mark, while youth unemployment continues to sit around a staggering 50%.
There is no pain-free solution for Greece, but it must begin by restoring its international competitiveness. The most obvious means of achieving this is via an exit of the Euro and the re-establishment of a local currency.
While Greece operates under the same monetary policy as Germany and the like, the mechanisms by which it can stimulate growth are stifled. The reintroduction of the drachma would allow Greece’s currency to reflect the economic circumstances of its own country, not Germany’s.
In other words, the currency would depreciate substantially, making Greek exports cheaper relative to its European partners and helping to rectify its current account deficit. Several estimates have suggested that the drachma would devalue by between 30% and 50%.
Roger Bootle and Jessica Hinds at Capital Economics, a London-based think-tank, use Iceland’s post-2008 experience to support such an argument. Iceland saw the krona depreciate by around 40% during the financial crisis. Capital controls were put in place and the country went through a torrid time for several years.
Since 2011, however, Iceland has grown in every year and national output has recovered fully. The devaluation was of particular benefit to Iceland’s tourism industry, where visitors rose by 60% between 2008 and 2014.
Other economists point to the examples of Argentina, Russia and South Korea, all of which achieved tremendous recoveries as a result of currency devaluations.
But Greece is different. Re-establishing the drachma won’t be without major problems. It will be extremely challenging and tumultuous to begin with, politically and economically.
Take trade as an example. Greek trade only makes up 33% of its economy. Iceland’s experience may offer lessons of a sort but its economic circumstances are not directly comparable – its trade, for example, makes up over 50% of its economy.
The near-term implications are also likely to be significantly adverse. Market confidence and growth will take a hammering early on. Stringent credit controls will be required to prevent capital flight. Not to mention, there are the practical implications of printing and substituting a major local currency.
Devaluation is not a silver bullet, then. It will take time to stimulate domestic production that replaces existing imports. It will take time for the benefits of increased tourism and export trade to feed through into prosperity for the Greek people. It will take time to pay down its enormous debt pile. And all of these things must be accompanied by the necessary structural reforms – not least to its failing tax regime.
But it will take a lot more time, if ever, for these things to happen if Greece remains a Euro country. For the long-term good of its people, those negotiating for Greece should show courage and take heart from the experiences of Iceland, Russia, South Korea and Argentina.
Info Angle. 