Plan to Leave Euro for Drachma Gains Support
Whispers of Return to Drachma Grow Louder in
Greek
Crisis
By Landon Thomas Jr.
New York Times, November 1, 2011
The political upheaval in Athens has suddenly made the
once unspeakable – Greek debt default – a distinct
possibility.
So now it is time to ponder the once unthinkable: that
Greece might end its 10–year use of the euro and return to
its 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.
"The real problem is that we are operating under a
foreign currency," Vasilis Serafeimakis, a senior
executive at Avinoil, one of Greece's largest oil and gas
distribution companies, said of the euro. In the last year, he
has been banging the bring–back–the–drachma drum.
"If we had our own currency, we could at least
print money," Mr. Serafeimakis said, referring to the
ability to revalue the drachma. "And what is the worst
thing that happens if we do this? I don't get a Christmas gift
from one of my bankers."
His voice is still a lonely one.
According to a recent poll in the Greek newspaper
Kathimerini, 66 percent of Greeks believe that returning to
the drachma would be bad. But proponents of a euro exit say
that beneath the surface, more Greeks are beginning to
question the euro.
"The view that Greece should exit the euro is more
widespread than you would think," said Costas Lapavitsas,
a Greek economist at the University of London who has long
pressed for a return to the drachma. "It is just that the
opposing view is so dominant."
Until now, many Greeks have been wedded to a European
identity forged by a national embrace of the euro and the
wealth that, for a time, came along with it. Talk of returning
to the drachma had mainly been held up as an apocalyptic
vision rather than a viable policy option.
But for a growing number of Greeks, the collapse of
their economy is apocalypse enough.
Prime Minister George A. Papandreou threw down the
gauntlet to the Greek people Monday when he surprised the
world by announcing a referendum on the latest bailout plan.
But it was his finance minister, Evangelos Venizelos, who that
same day put a finer point on the question.
"Are we for Europe, the euro zone and the
euro?" he asked. Or, he continued, does Greece return to
the drachma?
Under the latest bailout plan from Europe, Greek debt
held by private institutions would be written down by 50
percent. In return, as long as Greece stayed on track carrying
out painful austerity measures through 2015, Athens would
continue to receive more bailout money to finance its
remaining debt.
When Mr. Papandreou brought that tentative deal back
from Brussels last week, the escalated protests and rioting on
Greek streets were a sign that it was not something his people
would easily stand for.
Supporters of a return to the drachma note that the
severe budget cuts of the last two years had resulted in
almost closing the budget deficit – as long as interest
payments on its debt are not counted.
Stripping out interest payments, Greece is expected to
register a budget surplus next year of 1.5 percent of its
gross domestic product (compared with a budget deficit of 8
percent of G.D.P., when interest is counted), and that, in
effect, would give it the freedom to stop paying its debts.
It is an argument for defaulting on the debt and
starting over, in other words. That sense of reborn autonomy
is what lies behind the drachma movement that Mr. Serafeimakis
is promoting.
For more than a year, he has been educating himself
about the euro. He has pestered economists and written
passionate posts on obscure blogs, convinced that the benefits
from a devaluation of Greek's currency, while no doubt
painful, would result in a return to growth more quickly than
further wage cuts and layoffs.
Outside the country, meantime, many prominent voices
have argued for more than a year that it is impossible for
Greece to regain competitiveness while clinging to the euro
currency. They include prominent economists like Nouriel
Roubini, Kenneth S. Rogoff and Martin Feldstein, as well as
the investor George Soros.
Now, a small but growing band of Greek economists, none
of them very well known, is beginning to ask the same
question: namely, whether the benefit of having a cheap
currency under Greek control would outweigh the costs of
defaulting on its debt and abandoning the euro.
In a recent paper, Stergios Skaperdas, a Greek
economist at the University of California, Irvine, argued that
a cheaper drachma would stem imports, bolster exports and,
crucially, give Greece the flexibility to control its own
monetary policy and ease the effects of fiscal retrenchment.
Mr. Skaperdas conceded that getting this view across
remained a difficult one as many Greeks found it troubling to
accept that their euro dream might be over.
"For most Greeks, including economists, adopting
the euro was like marrying a dream spouse – beautiful,
intelligent, caring, even rich," he said. "And then,
rather suddenly, the marriage turned into a nightmare."
A euro divorce would carry substantial costs, most
profoundly an immediate run on Greek banks. That is why
mainstream Greek economists insist that there will be no such
outcome.
"There is no way that Greece leaves the euro –
this will take us back many years," said Yannis
Stournaras, an influential economist in Athens who has advised
past governments. "We would have a disorderly default,
the debt would double – it is out of the question."
But in a recent study, Theodore Mariolis, an economist
at Panteion University in Athens, argued that the No. 1
problem for Greece under the current system – ahead of debt
sustainability, unemployment and the problems of a mismanaged
public sector – was its international competitiveness, which
he said had declined 30 percent since the country embraced the
euro.
Mr. Mariolis estimated that a 50 percent devaluation of
the new drachma would soon erase this competitiveness gap.
The views of Mr. Mariolis and Mr. Skaperdas have
remained within the narrow confines of academia. Other
economists, like Theodore Katsanevas, have taken a more
aggressive approach by pushing their drachma solution on Greek
television.
"A Greek hotel room is two times as expensive as
one in Turkey," he said, ridiculing the notion that the
steep wage cuts and public sector firings that are being
demanded by Europe and the International Monetary Fund would
restore competitiveness. "We are almost dead now – what
we need is a resurrection."
In many ways, the drachma's most passionate and
well–known local proponent is also its most controversial.
For the last two years, the media magnate George Kouris
has used his flagship tabloid, Avriani, to run a relentless
campaign that argues Greece is best off leaving the euro for
the drachma.
Mr. Kouris, owner of the country's leading evening news
channel, is a die–hard opponent of Mr. Papandreou, and he
has been accused of pushing the drachma as a means to wipe out
his group's significant euro debts, a charge he denies.
But he is insistent that the only way forward is for
Greece to return to an earlier time.
"The people who now support the euro are the
people that put us into it and made us a sick country,"
he said. "Before the euro, a bottle of water was 0.50
drachmas. Now it's 1.70 euros. It is a tragedy."
(*) Eleni Varvitsioti contributed reporting.
Austerity
Faces Test as Greeks Question
Their Ties to
Euro
By Steven Erlanger
New York Times, November 1, 2011
Paris – The crisis of the euro zone has finally hit
the potholed road of real politics, with the Greeks now openly
questioning whether their commitment to Europe and its single
currency still matters more to them than control over their
own future and economic well–being.
During the two–year financial crisis, the wealthier
countries of northern Europe, led by Germany, have insisted
that their heavily indebted brethren in the south radically
cut spending in return for emergency loans. They have stuck to
that prescription even though austerity has undermined growth
and increased unemployment in Greece, Spain, Portugal and now
Italy, betting that people in those countries will swallow the
harsh medicine because their only alternative is to default
and possibly leave the euro zone altogether.
The turmoil in the government of Prime Minister George
A. Papandreou means that Greece is about to call that bet.
Many Greek politicians appear to be calculating, at this late
stage, that they have more to lose by sticking to Germany's
terms than by risking a messy default, and even going it alone
with their old currency, the drachma, outside the euro zone.
Austerity, in other words, is facing its first really
big political test.
"This is clearly the return of politics,"
said Jean Pisani–Ferry, director of Bruegel, an economic
research institution in Brussels. "The management of all
this by the Europeans has been fairly technocratic. But now we
see the gamble of a politician, which creates uncertainty
again, but in a different form. But it was bound to come at
some point."
Mr. Papandreou's decision to press for a popular
referendum on the bailout was the inevitable result of
Greece's loss of sovereignty to Brussels and the International
Monetary Fund, said Jean–Paul Fitoussi, professor of
economics at the Institute of Political Studies in Paris.
Chancellor Angela Merkel of Germany and President Nicolas
Sarkozy of France were acting as if they were the real
government of Greece, he said.
"It's as if the Europeans – or Merkel and
Sarkozy alone – believed that they were in control of the
people of Greece," Mr. Fitoussi said. "But this is a
democracy. In Greece, and even in Italy, you cannot expect to
rule without the support and consent of the people. And you
can't impose an austerity program for a decade on a country,
and even choose for them the austerity measures that country
must implement."
As the crisis has unfolded, this tension has only
increased. Complex bailout packages are hammered out by
officials in secret, then are usually sent to parliamentary
majorities for approval, without much recourse to the
democratic voters of the 17 European Union countries that use
the euro, all of which must approve each package.
As a result, the entire euro zone has found itself
periodically at the mercy of seemingly minor events – the
fall of the Slovak government, a court ruling in Germany, a
possible referendum in Greece – that threaten to bring down
the whole structure and wreak havoc in financial markets
worldwide.
The combination of back–room deals and ad–hoc
parliamentary approvals is necessary because the European
project is essentially incomplete. The 17 countries that use
the euro do not have common fiscal policies or political
leadership, and have widely varying levels of development.
They have a common central bank, but its mandate is far more
limited than that of the United States Federal Reserve, which
has intervened much more aggressively in the markets to shore
up troubled American financial institutions.
That has left euro zone leaders struggling to cobble
together rescue packages big enough to reassure markets but
small enough to pass muster with their own reluctant voters.
Both voters and markets remain deeply skeptical.
For some time now, experts have been wondering at what
point Europe would reach its "Lehman moment" in the
crisis, that point where the problem can no longer be
addressed with half measures. If Greece, faced with a second
bailout and another set of austerity demands, now says
"Enough," that point may be reached, forcing a
choice between a smaller euro zone or a softer, longer–term
rescue policy that emphasizes growth.
A Greek rejection of the deal could at the very least
put new pressure on the European Central Bank to continue to
prop up heavily indebted nations by buying their debt or even
becoming a lender of last resort, like the Federal Reserve.
That is a step that is anathema to Germans, who see it as
violating European treaties to benefit irresponsible nations.
But treaties can be changed, and Mr. Sarkozy still considers
the bank to be the best answer to the problem of how to set up
a firewall to protect the vulnerable while they try to fix
themselves.
Mrs. Merkel and Mr. Sarkozy are clearly irritated with
Greece, but so far they insist that the restructuring deal
agreed upon Thursday in Brussels remains, as Mr. Sarkozy said
Tuesday, "the only possible path to resolve the Greek
debt problem."
But Greece's turmoil has the makings of a turning
point. Greek elections during a deep economic slump would be
likely to usher in a government that would, at a minimum, to
try to renegotiate the bailout deal with European and foreign
lenders, a messy process that would force Germany and other
European lenders to decide how strictly to stick to their
austerity formula. The uncertainty would undermine confidence
in other indebted countries like Italy at a time they can ill
afford it.
There is also the possibility that an election or a
popular referendum would pose the question more bluntly, with
Greeks essentially deciding whether they want to stick with
the euro or not – if they want to put sovereignty over their
own affairs ahead of membership in the common currency. That
could mean the fraying, or at least the shrinking, of the euro
zone.
Mr. Fitoussi believes that Greeks had no choice but to
ask themselves that question. "There are only two
possibilities in a democracy: the government has to resign or
consult the people," he said. "Of course, I don't
know which is the worst for Europe."
A Referendum Spells Trouble
By Daniel Gros (*)
New York Times, November 1, 2011
Sovereign debt is debt of the sovereign – and this
sovereign can simply decide not to pay.
This was the key message when the Greek prime minister
announced that the country would hold a referendum on the most
recent rescue package agreed at the European Council of last
week. Investors in euro zone bonds have now been put on notice
that when the going gets tough, the real sovereign –
"we the people" – might be asked whether they
would like to pay, and are likely to say no. Greece might
simply be the first to take this approach; nobody can
guarantee at this point whether Portugal or Italy might be
next. The result is predictable: a soaring risk premium for
any debt from such periphery nations.
This decision to invoke a referendum could thus mean
the beginning of the end game for the euro.
It also implies that all those grandiose plans of
creating a political or fiscal union to support the euro have
one fatal flaw: governments may sign treaties and make solemn
commitments to subordinate their fiscal policy to the wishes
of Brussels (or to be more precise the wishes of Germany and
the European Central Bank). But in the end "the
people" remain the real sovereign; and they can choose to
say no. They can also topple the political leaders who push
for European unity and austerity, as is happening in Greece
with the confidence vote against the prime minister and his
referendum.
The E.U. remains a collection of sovereign states and
cannot send an army or a police force to enforce its pacts or
collect debt. Any country can leave the E.U., and of course
the euro area, when the burden of its obligations becomes too
heavy. Until now, it had been assumed that the cost of exit
would be so high that it would not even be considered. No
longer.
One should not forget that the U.S. had to settle this
question of exit from a union in a bloody civil war. In Europe
only ink will be spilled, but the economic cost will be
immense.
(*) Director of the Center for European Policy Studies in
Brussels.
This Could Be the End of the Euro
By Edward Harrison (*)
New York Times, November 1, 2011
Papandreou's decision to call a referendum has put the
Greek government at risk. Indeed, the government may collapse
before any referendum is called.
But the decision was necessary because austerity is
deeply unpopular in Greece and has already caused tremendous
social unrest. The new deal would see a cut of 100,000
government positions and the permanent presence of the
European Union, the International Monetary Fund and the
European Central Bank to ensure compliance. Given the
widespread perception among Europeans that the E.U. system is
undemocratic, there was no alternative but to put these
measures to a vote to ensure their political viability in an
already volatile social environment.
Given popular sentiment (60 percent are opposed to the
measure), a referendum would likely fail. Greece would default
with higher bondholder losses, triggering credit default swaps
and crystallizing losses across the European (and U.S.)
banking system. Greece and its banks would be insolvent. A
"no" vote would also mean even greater immediate
austerity as Greece would be cut off entirely from external
funding sources.
Will the collapse of the Greek government destroy the
euro zone? It certainly could. Italy's recoupling to the
periphery is well–advanced, making it now the focal point of
the sovereign debt crisis. Bond yields in Italy and elsewhere
in the European periphery have skyrocketed. Contagion has
spread to the banks as well.
Meanwhile, the euro zone has already started a double
dip recession, which will cause Portugal and other periphery
economies to miss their deficit targets. Redoubling austerity
efforts under those circumstances means civil unrest would
likely spread to these countries as well.
The E.C.B. has been forced to intervene for Italy.
However, the damage is already done. Unless the E.C.B. acts as
a lender of last resort, it is game over for the euro zone.
(*) Edward Harrison is a banking and finance specialist
at the economic consultancy Global Macro Advisors. He is also
the principal contributor to the financial Web site Credit
Writedowns.
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