Tuesday, July 14, 2015

Does Greece Need The Euro? Ask Israel.

"The Greek financial nightmare is a reminder of why countries benefit from having their own currencies,” David Ignatius wrote in the Washington Post last Tuesday, before the government of Alexis Tsipras grudgingly accepted terms for another bailout. This was “a reminder,” presumably, because there was no need to debate something so axiomatic. “In the old days,” Ignatius continued, “a flexible drachma could have been devalued to boost exports and economic growth.” Economists from Martin Feldstein to Paul Krugman have proposed this cause and effect as a solution to Greece’s crisis since it began, in 2009. Krugman made the point forcefully in his column on Friday, lashing out at European and American austerity hawks and pointing to Canada’s devalued dollar as the reason for its recovery from the 2008 meltdown. “Greece, unfortunately, no longer had its own currency when it was forced into drastic fiscal retrenchment,” Krugman wrote. “The result was an economic implosion that ended up making the debt problem even worse.”

There can be no doubt that, in the case of Greece, critics of radical austerity have the better side of the argument. All agree that the Greek economy has to grow at an accelerating rate if the country is to have a chance of meeting a good part of its debt obligations, however generously they are restructured. Krugman notes that the national debt, which was roughly one and a quarter times G.D.P. in 2009, is, after austerity, one and three quarters times that today. Almost a million people, in a country of just over ten million, worked for the government in 2009. You could insist, as advocates of austerity have, that this was unsustainable, but throwing a third of those employees out of work, cutting remaining public-sector salaries by a third, and drastically reducing pensions, as advocates of austerity did, inevitably suppressed local demand. They could not have expected private-sector entrepreneurs to invest in consumer businesses, either. Creditor banks in Germany will almost certainly have to take some losses to get the Greek government’s ledgers back into balance.

The supercilious tone of northern European bankers regarding southern European profligacy makes austerity proponents’ arguments hard to take, too. To make German unification possible, East Germany effectively received a one-time infusion of three hundred and twenty-billion Deutsche marks, in the early nineties, the equivalent of almost two hundred billion dollars at the time, which included a deal that allowed East Germans to trade their own pathetic marks for West German Deutsche marks at par. It is true, as many European Union leaders have suggested, that there is the issue of precedent with Greece: the more the European Central Bank proves willing to transfer wealth to poor southern economies, the shakier the euro will become. Then again, if the euro were the currency of the richer northern European economies alone, or, for that matter, if a united Germany’s engineering-rich, high-export economy were still on the Deutsche mark, a Volkswagen Golf produced in Wolfsburg would be too expensive to sell competitively in either the U.S. or Asia, no matter how many robots were put on the line. The connection between the value of currencies and the capacity to export cuts both ways.

None of this means, however, that the euro and the free-trade eurozone are inherently bad for weaker economies like Greece’s. On the contrary, the counter-proposal of cheapening exports through devaluation presumes an economy that makes things the rest of the world wants. That’s Canada’s, but not Greece’s: the sun can only do so much. Aside from tourism, the Greek economy mainly rests on exporting refined petroleum and processed agricultural products while importing crude petroleum and everything from cars to computers. You can’t devalue the drachma to the point that gasoline production, or olive oil and cheese production, would generate sufficient earnings for Greek workers to pay for cars and computers. (That’s why so many Greek workers borrowed euros on easy credit to buy them.)

Read on at The New Yorker