By BJ Bjornson
Following up on Dave�s post about the financial world�s shocked reaction to a country stooping to democratic means to determine its fate, it appears that the conversation is turning in the direction of bowing to the inevitable, defaulting on their debt and leaving the Euro to return to their former currency, the drachma.
Such a move is still officially anathema in Athens. But a growing body of economists argues that it would be the best course, whatever the near-term financial and economic implications. And now, with a referendum on the European-led bailout facing Greek voters, a vocal minority that has long called for a return to the drachma might find itself with a growing group of listeners.
A return to the drachma is unlikely to offer a quick cure for Greece�s ills. Default on the nation�s $500 billion in public debt would become a certainty, depositors would take their money out of local banks and, with a sharp devaluation of as much as 50 percent, inflation would loom. A return to the international credit markets would take years.
But drachma defenders contend that these worst fears are overdone. Yes, there would be disruption and panic initially. But, they say, pointing to Argentina�s case when it broke its peg with the dollar in 2002, the export boom ignited by a cheaper currency and the ability to control the drachma would eventually work in Greece�s favor.
All of which pretty much matches what I�ve been hearing for quite some time. There is of course more than a little fear that returning to the drachma will be painful, and that fear is not unfounded. But the harsh truth is that getting Greece�s books in order is going to be painful whatever way they go, and at least returning to the drachma and regaining control of their currency, offers a far more plausible way out of the mess than remaining with a currency they don�t control and whose value is based on far healthier economies than its own.
Of course, Greece has other problems that won�t be solved by simply returning to the drachma, such as the reason that they found themselves needing to borrow so heavily beyond their capacity to repay in the first place. Thanks to a link John provided in the comments to Dave�s post, we can safely say that the issue isn�t actually the favourite bugbear of conservatives everywhere, namely over-generous spending on benefits for poor people, but an all-too-common failure to look at the revenue side of the equation, particularly for a certain class in a way that looks all too familiar to the debates on this side of the Atlantic.
Historically, Greeks have been very good at constructing myths. The rest of the world? Not so great, if the current burst of commentary on the country is anything to go by. Reading the press, one gets the impression of a bunch of lazy Mediterranean scroungers, enjoying one of the highest standards of living in Europe while making the frugal Germans pick up the tab. This is a nonsensical propaganda. As if Greece is the only country ever to cook its books in the European Union! Rather, the heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. The top 20% of the income distribution in Greece pay virtually no taxes at all, the product of a corrupt bargain reached during the days of the junta between the military and Greece�s wealthiest plutocrats. No wonder there is a fiscal crisis!
So it�s not a problem of Greek profligates, or an overly generous welfare state, both of which suggest that the standard IMF style remedies being proposed here are bound to fail, as they are doing right now. In fact, given the non-stop austerity being imposed on Athens (which simply has the effect of deflating the economy further and thereby reducing the ability of the Greeks to hit the fiscal targets imposed on them), the Greeks really are getting close to the point where they may well default and shift the problem back to those imposing the austerity. This surely can�t be much worse than the slow execution they are facing today.
Emphasis mine. I�m beginning to see a certain inevitability to this solution. And as to the fears that doing so will cause the rest of the financial world to shun the country and cause its total collapse, the same was said of Iceland when they refused to socialize the gambling losses of their banks. The decision did hurt them, but they are recovering nonetheless.
Greece�s sovereign debt is a different matter, but as the quote above notes, whatever short-term pain a default may cause, suffering through a slow execution under the current regime is likely to be worse. Get it over with already.