July 5, 2015 Original Here
Europe
dodged a bullet on Sunday. Confounding many predictions, Greek voters
strongly supported their government’s rejection of creditor demands. And
even the most ardent supporters of European union should be breathing a
sigh of relief.
Of
course, that’s not the way the creditors would have you see it. Their
story, echoed by many in the business press, is that the failure of
their attempt to bully Greece into acquiescence was a triumph of
irrationality and irresponsibility over sound technocratic advice.
But
the campaign of bullying — the attempt to terrify Greeks by cutting off
bank financing and threatening general chaos, all with the almost open
goal of pushing the current leftist government out of office — was a
shameful moment in a Europe that claims to believe in democratic
principles. It would have set a terrible precedent if that campaign had
succeeded, even if the creditors were making sense.
What’s
more, they weren’t. The truth is that Europe’s self-styled technocrats
are like medieval doctors who insisted on bleeding their patients — and
when their treatment made the patients sicker, demanded even more
bleeding. A “yes” vote in Greece would have condemned the country to
years more of suffering under policies that haven’t worked and in fact,
given the arithmetic,
can’t work: austerity probably shrinks the economy faster than it
reduces debt, so that all the suffering serves no purpose. The landslide
victory of the “no” side offers at least a chance for an escape from
this trap.
But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?
The
most immediate question involves Greek banks. In advance of the
referendum, the European Central Bank cut off their access to additional
funds, helping to precipitate panic and force the government to impose a
bank holiday and capital controls. The central bank now faces an
awkward choice: if it resumes normal financing it will as much as admit
that the previous freeze was political, but if it doesn’t it will
effectively force Greece into introducing a new currency.
Specifically,
if the money doesn’t start flowing from Frankfurt (the headquarters of
the central bank), Greece will have no choice but to start paying wages
and pensions with i.o.u.s, which will de facto be a parallel currency —
and which might soon turn into the new drachma.
Suppose,
on the other hand, that the central bank does resume normal lending,
and the banking crisis eases. That still leaves the question of how to
restore economic growth.
In
the failed negotiations that led up to Sunday’s referendum, the central
sticking point was Greece’s demand for permanent debt relief, to remove
the cloud hanging over its economy. The troika — the institutions
representing creditor interests — refused, even though we now know that
one member of the troika, the International Monetary Fund, had concluded
independently that Greece’s debt cannot be paid. But will they
reconsider now that the attempt to drive the governing leftist coalition
from office has failed?
I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.
Imagine,
for a moment, that Greece had never adopted the euro, that it had
merely fixed the value of the drachma in terms of euros. What would
basic economic analysis say it should do now? The answer,
overwhelmingly, would be that it should devalue — let the drachma’s
value drop, both to encourage exports and to break out of the cycle of
deflation.
Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move
— after all, any hint of euro exit would set off devastating bank runs
and a financial crisis. But at this point that financial crisis has
already happened, so that the biggest costs of euro exit have been paid.
Why, then, not go for the benefits?
Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment
of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider
the alternatives. Unless Greece receives really major debt relief, and
possibly even then, leaving the euro offers the only plausible escape
route from its endless economic nightmare.
And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.
