With the coming to power of a left-wing government in Greece, there is now frenzied speculation among European politicians and journalists as to what will happen next.
The most important guide to the future is to realise that the European political class will do anything to protect what they regard as their greatest and proudest achievement – the euro.
The most bizarre comments are from the new Greek government itself to the effect that it wants Greece to stay in the euro – the very system which has brought it to disaster. But of course it wants most of its debts cancelled!
The second extraordinarily bizarre comment is from the so-called Troika of the EU/ECB/IMF who would have to agree to any Greek debt cancellation within the euro framework. The remark was to the effect that if Greece didn’t go along with the Troika’s demands, it could lead to a Greek exit from the euro (Grexit), resulting in “financial disaster” and “ruin”.
Everything points to the need for Greece to devalue its currency and the only way to do this is to re-establish their original currency, the drachma, at a rate well below the rate (341 drachma to the euro) at which it entered the euro in 2001 (perhaps 500 to the euro).
Greece is already suffering ruin
One despatch from Greece (by Nick Squires) describes the plight of one district on the outskirts of Athens. Here doctors working on reduced wages from the state, or for a charity Médecins du Monde, see malnutrition on a daily basis, children no longer being vaccinated against polio, measles, TB and hepatitis – a disease time-bomb waiting to explode. There are hospitals with no sterilised instruments and clinics with no doctors. Under 24 years old unemployment is around 70%, GDP has fallen from 2008 by around 25%, about the same as in the USA in the 1930s after the crash of 1929. This is for a country whose per capita GDP was €19,000 as recently as 2012, doubtless flattered by the effect of the loans it took on after 2001 and for which repayment is now due.
Managing the transition to the drachma
If the Eurocrats and the Greek political establishment – including now the new party of government, Syriza, would just accept the inevitability of Grexit, they would find the transition from euro to drachma relatively easy. Clearly the external finance side would have to be managed by, in effect the sort of debt relief that Nigel Lawson persuaded the IMF to do for African countries in the 1980s, probably in Greece’s case converting euro loans into drachma loans at a rate which Greece could be expected to manage in 2-3 years’ time.
Germany has no justification for resisting Greek debt forgiveness
Before creditors like Deutsche Bank get hot and bothered by this “haircut”, they should recall that they lent very freely to the Greek public sector after 2001 to enable it to undertake massive infrastructure projects which the country actually couldn’t afford. An outstanding example is the Athens metro system with tunnelling equipment, rails, rolling stock, ticket machines and signalling equipment all supplied by German companies, Siemens AG and Herren Knecht AG. Keeping an exporting country’s currency low, relative to the importing country’s (which is what the euro does for Germany) is exactly what the forerunner of the ECB, the Reichbank, did during the 1930s, turning Eastern and Central Europe into German economic colonies without the need for a shot to be fired. …[more»]