by Stephen Bryen
Greece still faces an uncertain future as its leftist government tries to strike a deal with its European creditors. Whether a deal is possible and what it will be remains cloudy at best. Meanwhile the Syriza government is starting to totter over coming up with any deal that requires more austerity. The latest European proposal which would have reduced Greek pensions has only added fuel to the fire.
The debate inside and outside Greece has mostly been over a Greek exit (“GREXIT”) from the euro. The Greek government uses it as a kind of threat over the creditors; some of the creditors use it as a way of getting rid of a nagging, insolvable problem.
There are significant consequences to GREXIT. One is the impact on the other Euro states, especially the vulnerable ones. Another is the strong risk that GREXIT would also hasten Greece’s exit from NATO. This could also lead to an unraveling of the NATO collective defense system, already weakened by dismal defense budgets and aimless leadership.
Of course there is no necessary reason why Greece would have to exit the Euro currency even if it failed to pay its debts. The other Euro countries could demand a Greek exit, but whether they can actually impose an exit is far from clear. And Greece does not need to leave the Euro if it does not want to do so. Even if Greece defaults entirely on its debt, it seems that it can legally stay in the Euro zone.
This leaves open what Greece should do, and what the Euro creditors should do. The idea of continuing to pressure Greece with austerity measures is a dead end which will continue to churn up problems in the Euro zone that could lead to trouble in the other, weak Euro countries such as Spain and Italy. Even France, which pretends to be solvent, really is not. Does anyone think that feisty Frenchmen would accept an austerity program?
The better way is a provisional deal based on the following elements:
1. a twenty five year debt repayment plan that is linked to improving Greek prosperity. No prosperity, no payments. Such a plan if it is sufficiently generous would not need austerity measures for Greece to make repayments.
2. a second domestic currency for Greece that covers sensitive areas such as civil service salaries, pensions, and other payments for services in the domestic space. The currency applies to local products and services only; it is not a trading currency which will remain as the Euro. To keep the domestic currency stable, a five year period where prices are fixed or moderately indexed to the new currency, thereby protecting against dilution of the currency’s value.
3. the ability for tourists to buy the local currency to cover most of their Greek domestic activities (hotel rooms, restaurants, local transportation). This will make the currency profitable to a degree.
Of course Greece’s creditors won’t like having to wait to get paid; but waiting is better than a complete wipe out.
There have been many criticisms of a second currency, but mostly these criticisms are based on the idea of a GREXIT leaving only the local currency to fend for itself. In the above scheme the local currency exists alongside the Euro and for five years is stabilized by moderate price controls.
Price controls can, and do, work although sometimes they cause distortions meaning they have to be term limited. America put in place price controls during World War II that lasted for some years after the war: it was a time of great prosperity. In the early 1970’s President Nixon also put in partial price controls, particularly rent control, during a period of spiraling inflation. Some jurisdictions such as New York, have long had rent controls. It is clear that when handled wisely price controls work to protect people, especially the most sensitive lower middle class which is suffering in Greece.
Syriza and its leaders, of course, need to stop playing power ball with their rich friends in Europe and take action to put in place a credible program for relief. The simple outline above is a starting point for a plan.