Greece: ‘To Euro or Not to Euro’ is Not the Question We Should be Asking

Euro and GreecePublished: 7 August 2015
Author: Jonathan Clyne

In the face of the brutal blackmail of the Troika, the Syriza government broke its anti-austerity promises. Much of the debate since then has focused on whether the government could have avoided this by leaving the Eurozone. It is a debate that risks tearing Syriza apart. Many on the left believe that leaving is a decisive step towards resolving the Greek crisis. Leading Keynesian economists of various shades, such as Krugman and Stiglitz, and many British conservatives agree. They are wrong. As are those on the Left that argue that Greece must stay in the Euro. If Syriza splits on this question, both parts will end up in a dead-end.

The left and the right in Syriza and internationally are ignoring the most important means for resolving the Greek crisis – raising the level of productive investment in the Greek economy. In the last weeks before the climb-down, former Greek Finance Minister Varoufakis outlined a plan to do precisely that. It has not been commented on since. That is the most tragic thing about the present discussion. Varoufakis?s plan ought to be at the centre of discussion about how to end the crisis, not only in Greece, but also throughout the capitalist world. Staying in or leaving the Euro is a secondary question.

Although almost completely ignored in the popular Euro discussion, some of the clearest arguments in favour of a Grexit, come from German academics like Hans-Werner Sinn in his book published in 2014 called ‘The Euro Trap’. Sinn is Germany?s leading mainstream economist and adviser to the German government.

Sinn?s argues that before the creation of the Euro, the poorer European countries (Greece, Italy, Portugal, Spain, Ireland and Cyprus) were less competitive. As their currencies might be devalued at any point, lending to these countries was considered more risky and therefore interest rates were higher. The introduction of the Euro reduced interest rates in these countries to German levels. Financial capitalists no longer felt the need to factor in an exchange rate risk in their calculations. Cheap credit led to an explosion of borrowing, which foreign capitalists were more than willing to supply. A speculative boom took off, but it did not increase competiveness. On the contrary, it declined, because labour costs were artificially inflated. Wages rose because there was more money in the economy, not because Greece had become better at producing things and exporting. Instead, the boom sucked in imports.

Sinn writes that because German capitalists helped finance this bubble, German workers were left in the lurch. By 2005, German unemployment was among the highest in the EU as German capital moved abroad. According to Sinn, this was Germany?s own Euro-crisis, which Germany gradually got out of via austerity leading to export successes. (It is questionable whether Germany?s exports increased because of austerity. Other factors, such as the particular mix of German exports were involved, but that is a separate discussion that does not detract from the substance of Sinn?s line of reasoning about the Euro.)

The 2008 Crisis
When the world crisis struck in 2008, the countries involved in an economic bubble inflated by debt were hit harder than others. Finance capitalists (German, Greek, and other) became doubtful that public and private debts could be repaid and sought a safe haven in among other places Germany. Since then German unemployment has declined to the point where it is now one of the lowest in the EU. According to Sinn, Germany is being rewarded for the austerity it suffered while others were on a binge earlier (although much of the low unemployment is due to 1.4 million workers at 60,000 workplaces participating in work-sharing during the height of the crisis).

As the crisis unfolded, Germany and other surplus countries had to help the deficit countries by various means in order to compensate for the withdrawal of capital and to preserve the Euro.

Sinn did not believe that it was politically feasible to push through a direct reduction of wages to restore competitiveness. He sees only an indirect way of slashing wages ? leaving the Eurozone and devaluing. Greece has the biggest problems. Therefore, Grexit should occur first. His assumption seems to be that perhaps this will pressurize other poor Euro-countries into reducing their wages. If that does not happen, they have to be kicked out too.

Germany would also benefit from Grexit, because they would not have to worry about constantly bailing out other countries. A Eurozone without Greek-style speculative booms would be stable and grow faster. For Sinn, getting rid of Greece was worth giving them a large write-off on their debts. Sinn is right that Greek competitiveness must be restored. However, because he relies on market forces for investment, he does not see state-led investment as an alternative to restore competitiveness.

Schauble is a lawyer, not an economist, but since at least 2012 he has shared Sinn?s view of the need for Grexit. Timothy Geithner describes in an interview (see here) how he travelled when he was US Treasury Secretary, to the German holiday island of Sylt to discuss with Schauble. Geithner says he was stunned because Schauble ?told me there were many in Europe who still thought kicking the Greeks out of the Eurozone was a plausible ? even desirable ? strategy.? Later, Geithner wrote in his memoir, ‘Stress Test: Reflections on Financial Crises’: ?A Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union,? and ?The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.? Even this spring Schauble is quoted as asking Varoufakis “How much money do you want to leave the Euro?” (see here). It should therefore not have been a surprise that German finance minister Schauble?s five month “negotiations” with the Greek delegation were merely an attempt to get Greece to “voluntarily” leave the Eurozone.

A Prepared Stategy
People like Merkel and Schauble, not to mention the numerous other right wing leaders in the Eurozone, have been vindictive against Syriza because it is left wing. They have wanted to humiliate Syriza. This is not just because it is their natural inclination towards anybody that threatens their interests and prejudices, but also they have wanted to demoralize the left in their own countries. However, the basic direction of what they wanted was already clear before the election of Syriza ? to force a Grexit.

Obviously, for German capital the world economic crisis is not the right time to grant reforms. However, although it makes for good propaganda, it is simplistic to therefore draw the conclusion that this was the only thing that lay behind German intransigence against the Syriza government. Rather their attitude was a reflection of a longer-term worked out strategy to create a strong unified Euro-zone, under German control. They were prepared to pay for that. Some sources report that they were prepared to offer Greece up to 50 billion Euros to leave (see here).

Greek Majority Remains for the Euro
On the other side, the Greek people have been tenaciously clinging onto the Eurozone. Even now, after the imposition of an even worse program by the Troika, opinion polls (for what they are worth) show a clear majority in favour of staying in the Euro. Before the referendum, this positive view of the Euro could be dismissed by people on the left as the result of scaremongering by the bourgeois media. That explanation has no credibility any longer. During the referendum, scaremongering in favour of a Yes was raised to fever pitch, and was overwhelmingly ignored.

The alternative explanation to continued adherence to the Euro is that Greeks understand through their own experiences exactly what Sinn is saying. Devaluation will make things worse for them. Just take anybody who has loan. Once Greece leaves the Euro, interest rates will soar again. For those that have loans from banks outside of Greece denominated in Euro, they will also be burdened by having to repay their loans with vastly devaluated drachmas. Most likely, this will lead to a series of company and household bankruptcies. In addition, the price of imported goods will rise steeply, many of which, like oil and German cars, cannot be produced locally for many years to come, if at all. As wage rises generally lag inflation, devaluation becomes an effective way of reducing wages. The combination of steep increases of interest rates and lower wages, on top of the deprivations that Greeks have already endured, is not an attractive alternative.

Greece should never have joined the Euro, but once it had, and people and companies took advantage of the low credit available, pulling out becomes very painful. Nobody knows how painful. It appears that the Greek people, looking at their own purses, have valued the cost highly.

Is there Freedom Outside the Euro?
The counter-argument is that it might cost initially, but after leaving the Euro, Greece would be free and could work out an economic policy that benefits the majority, for example by reflating the economy. However, how can Greece be ?free? if it has a huge balance of payment deficit and owes massive amounts to banks and institutions outside the country? Many countries that have not been part of the Euro have endured austerity imposed from the outside. Decades of IMF Structural Adjustment Programmes bear witness to how ?free? one is when one has debts and a trade deficit. Before the fall of the Berlin Wall, even non-capitalist countries like Yugoslavia, Poland and Hungary, became ensnared by the IMF due to their debts and their failure to export.

A heavy devaluation of a new Greek drachma is no certain way towards making Greece competitive. In fact, a lot of evidence points in the opposite direction. Take the experience of the UK and its long history of devaluations. Disregarding short-term fluctuations, each devaluation led to a spiral of lower productivity, rising trade deficits, and further devaluations. Put simply, the main reason for this is that capitalists see no reason to invest in better technology if they can instead increase their profits by pocketing the benefits of devaluation. British productivity has grown at an appallingly slow rate. Devaluation is the name of the game in countless developing countries that fail to catch-up.

Greece seems to be stuck between a rock and a hard place. To stay in the Euro, Greece has been forced to accept draconian austerity that will prolong the recession. Leaving entails devaluation, personal and company defaults, lower productivity, and further devaluation.

A Different Plan from Varoufakis
However, in a fascinating snippet, Varoufakis revealed a new path for Greece was being investigated. Its contours are unclear and it is cloaked in the perspective of future privatisations (although he also writes that the new plan would ?allow the government to choose which assets are to be privatized? in a few years time, opening up for no privatisations at all). I have not seen a single discussion about Varoufakis new plan, so I think it is worth quoting more or less in full the few remarks he makes about it:

The Greek government proposes to bundle public assets (excluding those pertinent to the country?s security, public amenities, and cultural heritage) into a central holding company to be separated from the government administration and to be managed as a private entity, under the aegis of the Greek Parliament, with the goal of maximizing the value of its underlying assets and creating a homegrown investment stream. The Greek state will be the sole shareholder, but will not guarantee its liabilities or debt.”

The holding company would play an active role readying the assets for sale. It would ?issue a fully collateralized bond on the international capital markets? to raise ?30-40 billion ($32-43 billion), which, ?taking into account the present value of assets,? would ?be invested in modernizing and restructuring the assets under its management.?

The plan envisaged an investment program of 3-4 years, resulting in ?additional spending of 5% of GDP per annum,? with current macroeconomic conditions implying ?a positive growth multiplier above 1.5,? which ?should boost nominal GDP growth to a level above 5% for several years.? This, in turn, would induce ?proportional increases in tax revenues,? thereby ?contributing to fiscal sustainability, while enabling the Greek government to exercise spending discipline without further shrinking the social economy.”

In this scenario, the primary surplus (which excludes interest payments) would ?achieve ?escape velocity? magnitudes in absolute as well as percentage terms over time.? As a result, the holding company would ?be granted a banking license? within a year or two, ?thus turning itself into a full-fledged Development Bank capable of crowding in private investment to Greece and of entering into collaborative projects with the European Investment Bank.?? (source here)

I interpret what Varoufakis says as follows: Private investors cannot be relied on to get investment, and thereby growth, going. The initiative falls to the state to use and develop the only means it can have a clear control over ? the state owned sector. By coordinating the whole state sector (the creation of a ?central state holding company?) its strength can be maximized to prepare it for competing in the world market (?managed as a private entity? and ?with the goal of maximizing the value of its underlying assets?). This would boost growth to above 5 percent. This is a level of growth that has only been consistently achieved by China in the past three decades, because state investments dominate the economy. In Greece, growth would lead to a proportionate increase in tax revenues removing the threat of government deficits and paving the way for genuine reforms. State investment led growth would encourage the ?crowding in? of private investment in the Greek economy as private capital always has greater opportunities in a rapidly growing economy.

On a limited scale, this bears a clear resemblance to ?dynamic planning? that I put forward in a previous article (see here). However, there is no mention of directing part of state investments towards exports to resolve the trade deficit, which will automatically reappear if growth gets going again without increases in productivity. To stimulate growth and productivity at the same time, the banks and the companies of the oligarchs need to be expropriated. By treating these companies in the same way as Varoufakis proposes for the existing state sector, an even more rapid positive spiral of investment, growth, productivity increases, greater tax income, improved public services, and exports can be put in motion.

A Partial Debt Repayment Default is Vital
Varoufakis envisages that the capital for this investment plan be raised in the market. This might not be possible or even desirable, especially now when the Greek state is already saddled with unsustainable debts, which will lead it from crisis to crisis. Refusing to pay the Troika under any other conditions than the ones that Germany received at the 1953 London Agreement would make it possible for the Syriza government to begin to implement this strategy. The London Agreement on German External debts, as it was called, reduced Germany?s debts (public and private) by half, stretched out their repayment over thirty years, and limited repayments to 3 percent of export earnings, if Germany had a trading surplus. Some of the debts were to be repaid after German unification, so it was not until 2010 that the final amount was paid back. For Greece, such an ?agreement?, whether imposed unilaterally or by mutual consent, combined with cuts in military expenditure, improvements in the state bureaucracy, taxing the church, more efficient tax collection and numerous other measures that a democratic administration could implement, would provide enough money for an investment plan.

With a partial default, the Troika could no longer hold a gun against the head of the Greek government. Because of the past years? austerity, the Greek government already has a primary surplus. A primary surplus means that government has more than enough to pay for all its expenditure except for interest on and repayment of debt. It only needs to borrow money to pay for its debts. By defaulting on them, the government does not need to borrow any new money.

Foreign trade is close to being balanced because the Greek depression killed imports. No money can disappear out of the country that way. Further reducing dependence on the Troika.

Finally, if the government nationalises the banks and imposes capital controls, the rich can be stopped from continuing to take their money abroad.

Therefore, no money would flow out of the country because there would be no debts to repay, no surplus of imports over exports to pay, and rich people would not be allowed to take out most of their money. The Euros within the country would be sufficient to keep the economy going, and the ECB would not have the means to asphyxiate the economy.

Foreign Interference
Of course, the ECB and the Eurogroup of finance ministers will try any number of different tricks to undermine the strategy outlined above. So will the IMF, the USA, and many individual governments and companies. Such a strategy will not be easy, but each trick has to be confronted concretely, not by pretending that sabotage can be avoided by being outside the Euro. This does not mean that one should exclude the possibility of leaving the Euro. On the contrary, Varoufakis was quite right to prepare for such an eventuality, if it should become unavoidable. One cannot go into negotiations with one hand tied behind once back. If anything, the preparations were not sufficient, but they are no substitute for an investment strategy for pulling the Greek economy out of the relative backwardness it has been in for ages. However, with a default leaving the Euro would be avoidable. At least for now. Later a new situation might make it necessary, but by then the practical and political preparation could be better.

The example of Japan during its post-war catch up phase shows that a proper investment strategy need not lead to a spiral of either austerity/recession/falling living standards or devaluation/higher interest rates/falling living standards. In Japan, there was a spiral of massive state-organised investment, rapid increases of productivity, rising exports, fast wage growth, and revaluation of the currency. Since then, South Korea and Taiwan have also had state-organised investments, growth and revaluation. It can be argued that because these countries were front-line states in the Cold War and there was a post-war world economic upswing, they enjoyed exceptionally favourable conditions during their ?catch-up?. However, China has not had these advantages and has succeeded anyway. This is because China has had more, not less, state-organised investment. The dominant sector of the economy has been and still is state owned. Therefore, the state has been able to raise a lot of capital and implement massive investments, without having to worry if these investments are profitable in the short term for each individual company. Greece has not got the advantage of China?s size, but it has the advantage of being far more advanced, and due to membership of the EU it has at least as easy export opportunities as South Korea and Taiwan had during their period of rapid growth.

An Alternative Investment Strategy
It is high time for the left to break out of the trap of thinking that either investments are simply something that happen because the ?market? likes what the government does (whether it be devaluation/reflation outside the Euro or austerity inside the Euro) or that a Soviet-style economy is needed. A more realistic alternative is state-led investment in what to a large extent remains a market economy.

In the short term, during the next couple of years at any rate, this strategy can put the Greek economy back on its feet. What happens in the medium term is indeterminate. There are too many factors to make a reasonable assessment. How strong will support be outside of Greece? Will the Troika have problems elsewhere or will it be able to focus on undermining Greece? Will the EU have disintegrated? Will China have replaced the USA as the world?s most powerful economy? Will there be a war on the Balkans? What measures will have been taken to take control over the Greek military? And many more questions. Whatever the situation, it will have to be dealt with when it happens.

A Long-term International Solution
In the long run, one thing is certain. Greece cannot tread the path outlined above alone. Eventually, however competent the Greek government is, the constant grinding opposition of the world?s capitalists will create a situation that the Greek government and people cannot handle. Therefore, in the long run, and perhaps even already in the medium term, there is no alternative to social transformation throughout Europe. Bit-by-bit each national movement can be tied together. However, even then a state-led investment strategy will have to be at the economic centre of a social transformation, although it would be a joint European plan. Neither Keynesian reflation nor Soviet quantitative planning will be of any help. They Are No Alternative…

In his comments about the need for an investment strategy, Varoufakis ends by writing ?At a turning point in European history, our innovative alternative was thrown into the dustbin. It remains there for others to retrieve.? The international labour movement internationally must rise to the challenge.

2 thoughts on “Greece: ‘To Euro or Not to Euro’ is Not the Question We Should be Asking”

  1. I agree that the EMU is not the central question, but I also think that Grexit would be unavoidable if Greece would abolish austerity, take certain steps towards socialism and so on. And therefore to be responsible towards their own people, they would have to prepare what to do when they are thrown out.

    Is really “leaving or not leaving” the question or is the question not rather “leaving or getting thrown out”?

  2. Maybe any anti-austerian government will get kicked out of the EU. But as baseball star Yogi Berra said, ?It’s tough to make predictions, especially about the future.? My concern is to discuss what an anti-austerian government can do to maximize its chances of success. That does not include voluntarily leaving either the euro or the EU. It does include being prepared for being kicked out of either.


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