Dr Peter Morici: Austerity is imposing
intolerable unemployment and political chaos in Greece, and won’t permit it to
repay its debts. Athens must abandon the euro and reintroduce the drachma.
After the euro was adopted in 1999, productivity
growth was slower and prices rose faster in Southern Europe than in Germany and
other northern states. The more competitive north enjoyed growing trade
surpluses and the Mediterranean states deficits.
Trade deficits can instigate high unemployment
and curb tax revenues, and to create jobs and finance social programs, many
Eurozone governments borrowed too much.
After the 2008 financial crisis, European banks and bondholders calculated these
economies would never pay down their debts and began demanding higher interest
rates on their bonds.
Greece, Italy and Portugal could not sell new bonds at affordable rates, and
facing insolvency, required bailouts from richer European governments. Also,
Greece imposed on losses—so called haircuts—on private bondholders, but not on
the governments and the European Central Bank holding its debt.
For austerity and debt restructuring to work, Greece must generate new exports
and curb imports to accomplish trade surpluses and earn euro to begin paying off
its remaining debt.
Austerity and labor market reforms will require at least 5 to 10 years of
unemployment at 25 to 50% to drive wages and prices down enough to accomplish
the necessary trade surpluses. No government can sustain voter support for such
a draconian policy.
In Asia and Latin America, governments in similar situations have permitted
their currencies to fall in value against the dollar and euro, lowering prices
for exports, raising prices for imports, and limiting the unemployment that
To accomplish the same, Greece must abandon the euro and reintroduce the
At an initial exchange rate determined by Athens, it must quickly swap paper
euro for the new currency, convert existing bank accounts to drachma, and
re-denominate all domestic contracts and debts.
Then, simply let the drachma float—the new currency would fall in value enough
to make Greece an attractive export platform to northern Europe, and accomplish
a trade surplus to pay off its debts, now denominated in drachma.
Bank deposits would fall in value, as computed in terms of euro and dollars, and
the potential for loss of wealth would cause depositors to withdraw funds and
convert those to euro—a run on the bank.
To curb such capital flight, Greece must impose temporary controls on capital
outflows, much as European nations did after World War II. Once the drachma
settled to a reasonably stable value on foreign exchange markets, those controls
could be gradually withdrawn and then eliminated.
More problematic is Greek government debt, denominated in euro, to foreign
bondholders, banks and governments. International law requires those be
renegotiated if Greece can’t pay in euro.
If those creditors insist on being paid in euro instead of drachma, Greece will
never earn enough euro to pay them and be forced to default and unilaterally
impose a huge haircut—perhaps 100%.
In the end, Greece is a sovereign state, and if compelled by Germany, the ECB
and other creditor intransigence, it can impose remarking of foreign debt to
drachma and whatever additional haircut it chooses.
If foreign creditors cooperate and accept payment in the new currency, the
losses they take will be substantially less than the haircut they will
ultimately endure if Greece continues its austerity measures and remains on the
Without the euro, Greece would still be a member of the European Union—much like
Great Britain and a few others who have chosen not to adopt the common
currency—however, Germany and the others could force Greece to leave if it
abandons the euro.
However, if Greece were denied the tariff free access to European markets as a
member of the EU, the devaluation of the drachma necessary to accomplish
economic stability and repay remaining debts in drachma would be much greater
than if northern governments cooperated in the introduction of the drachma.
That would make foreign creditors even larger than if Greece stayed inside the
In the end, Greece, Germany and other Greek creditors will be better off
accepting the euro has failed and helping Greece readopt its own currency.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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