• Debate
  • Return to drachma is no solution

  • By Joachim Bischoff , Thomas Händel , Axel Troost , Harald Wolf , Björn Radke | 18 Aug 15 | Posted under: Greece , Euro
  • The Greek government has just barely been able to avert the Grexit, i.e. having to leave the euro, by agreeing to enter into negotiations on a third bailout with other euro countries at the Euro Summit on the night of 13 July.

    Total Surrender?

    The tough neoliberal reform programmes and the downright blackmailing of the Greek left-wing government have caused outrage among the German and European left. The agreement reached at the Euro Summit is founded on extortion. Alexis Tsipras has emphasized this on several occasions. The reforms perpetuate neoliberal austerity and curtail the sovereignty of the Greek government and the rights of the Greek parliament. Tsipras is right to expressly distance himself from the achieved results: “I assume liability for a text I do not believe in but which I signed to avert disaster for the country.” He described the agreement as a “painful compromise, both politically and economically. Willingness to compromise is one aspect of political reality and revolutionary tactics.” And: “We were facing a dilemma and being threatened with violence.” He agreed to the deal because he estimated that the alternative – the Grexit – would have been far more destructive than the diktat of 13 July.

    Why compromise?

    Most of the members of left-wing coalition Syriza believe that agreeing to the deal is necessary, despite all the criticism. Minister of Economy, Infrastructure, Shipping and Tourism, Giorgos Stathakis, for instance, argues that this agreement averts the looming Grexit, allows for a less harsh adjustment of public finances and beyond this includes a €35 billion growth package. In addition, it contains a 30-year long-term EMS (European Stability Mechanism) funds programme which will replace previous IMF and ECB loans. Thus, the aim is to restructure Greek debt. This development opens up a prospect for substantial debt relief, as the IMF has been demanding for a while. Although many of the measures intended as part of the agreement exacerbate the recession, the agreement is in no way comparable to the first and second memorandum of understanding, which demanded budget cuts of 15% of the GDP over four years as well as pension and wage cuts by 30 to 40%. Instead, this third memorandum budgets for lower primary surpluses (of the national budget, debt service excluded) to be gradually increased until 2018, allowing for some flexibility.
    This would mean that the requested annual adjustment of budgetary figures (i.e. further reduction of the deficit) will be at about 1% of GDP. [1]

    It is hard to say if these assumptions will show to be true, which is why it is entirely unclear if the Grexit indeed is a fear of the past.

    Prime Minister Alexis Tsipras is aware of this risk: “The result, certainly, is very difficult to implement, but on the other hand, the Eurozone had been brought to the limits of its resistance and cohesion. The next six months will be critical, and the relation of forces that will be built in this period are just as crucial. At this moment, the destiny and the strategy of the eurozone have been called into question. There are several possibilities. Those who said ‘not a single euro more’ have in the end decided not on just one euro but 83 billion. Therefore, from 10.6 billion over five months we’ve gone to 83 billion over three years, with the additional crucial feature of the commitment around debt reduction, to be discussed in November. This is a key issue, determining whether Greece can enter on a path that gets it out of the crisis.“ [2]

    The counterargument...

    The counterargument held by Syriza and some among the European left is: It was wrong to give in to international creditors. The government must liberate itself from previous memoranda, must not sign any new memorandum, must not enter in any commitments with creditors that would override government programmes, and it has to devise and promote alternative solutions persistently proposed by many members of Syriza in party committees.

    This requires a coordinated set of measures within the framework of a comprehensive alternative plan that not only includes a (new) national currency, but also encompasses measures to question and cancel the major part of national debt, to nationalize banks, to tax high profits and large fortunes, to supervise systemic mass media, to diversify energy sources, multilateral international relations, trade agreements within and outside the EU, to finance growth packages to recreate the country’s production base and in particular to end austerity and restore social and workers’ rights that have been abolished by the memoranda. All of these are part of Syriza’s quintessential statements claiming they will lead the fight in the eurozone negotiations. But they also claim that should they continue to be forced to accept additional memoranda, they will not allow for the people of the eurozone to be exterminated.

    Difficulties will be encountered promoting these alternative solutions. There are many studies, though, which confirm that after only a few months, the following effects will occur: exports will increase while imports will decrease, primary sector production (raw materials or agriculture, for example) will improve, tourism will increase dramatically which will lead to (the restoration of) economic liquidity required for large public and private investments which in turn boost development and employment. 

    … to a liberating Grexit

    So does the plan B – a liberating Grexit – bode better for development? The risks are evident: A “return to the drachma” would cause the national currency to
    crash, and it would at least halve the value of citizens’ bank deposits. In addition, it would lead to a dramatic decline in purchasing power both of wage earners and pensioners.

    One of the chain of arguments by advocates of Grexit is: “Athens does not obtain any new loans and immediately ceases all payments to entities abroad. Financially, the country is then left to its own devices and has to introduce its own currency as it is running out of euros. This is feasible, after all the country would not service any foreign debt anymore; ultimately Greece will achieve a primary surplus. The new currency will depreciate considerably. Imports will become more expensive, which will provide the stimulus domestic production needs so urgently. Greece will suddenly become cheap, which is why capital will flow back into the country. International aid, for instance the provision of imported medicine, will still be required for an interim period, though. Two or three years down the line, Greece will have recovered and will be granted a debt moratorium and debt relief.” [3]

    This would allow Greece to keep its remaining national property as further privatization would become unnecessary: Privatization of public assets (by means of the “Hellenic Republic Asset Development Fund”, HRADF) initiated by the last, conservative government with little success is to be enshrined as a binding commitment as part of the agenda of the third bailout. A trust fund is to be set up for sales of shares and total privatization totalling €50 billion. Half of this revenue is to be used for the capitalization of banks. Half of the remaining €25 billon is to be used for debt reduction, the other half for investments in business and infrastructure.

    The second aspect of this argument is that Greece was forced to surrender a great part of its parliamentary democratic sovereignty in exchange for the third bailout. Greece’s sovereignty would not be curtailed if Greece decided to exit the euro system out of its own accord.

    Let us have a closer look at these arguments:

    1. Return to the drachma

    Leaving the euro would require Greece to switch currencies. Other countries could continue using the euro while the Greek drachma would depreciate significantly once introduced. The drachma would have to be introduced fast to contain capital outflow. Capital controls already in place will be upheld.

    The new currency would be introduced and realised on bank holidays by virtue of parliamentary resolutions. The new currency would be regulated and supervised by the Greek central bank. This would be combined with the conversion of all cash and asset accounts. Existing accounts and funds would be converted at a previously determined exchange rate, e.g. 1 drachma = €0.60. Deposits and debts in other EU countries would have to be converted in the same manner.

    This monetary changeover would be immediately followed by massive devaluation. Assets in drachma would depreciate, those listed in euros would significantly appreciate. This aims to revive competitiveness of the Greek economy. Still, financial markets would arguably have little faith in the new drachma. Massively appreciated debts listed in drachma are unlikely to be paid off. The changeover would lead to insolvency, suspension of payments to service foreign loans and ultimately debt rescheduling negotiations at an international conference. Debt could initially rescheduled via the Paris Club, an informal group of public creditors negotiating debt relief programmes. The IMF would have to play a key role in this since the Paris Club only offers support if IMF programmes have been implemented successfully. This again would mean further reforms as enforced by means of the memoranda until now – Greece would not make any progress but would be quite a bit poorer. Potential negotiations could conclude with an internationally recognized ‘haircut’; access to the international loan and capital market would be extremely limited both for public and private actors and would entail high interest rates until the conclusion of talks, though.

    Maximum loss for Germany in case of Greek bankruptcy €87 billion.[4] In case of an exit from the eurozone, Greece could force a restructuring of its debt. Additionally, €110 to 115 billion the Greek central bank has received as ELA emergency loans will remain at the disposal of Greek banks or private individuals. If Greece were to leave the EU, these funds could not be reclaimed.

    As Greek banks are undercapitalized – most recently due to massive withdrawals of bank deposits – many banks would have to be merged and repositioned with the financial participation of remaining businesses and savers (‘bail-in’). The planned nationalization of the ailing banks would be a difficult balancing act between expanding national debt and allowances for ailing loans, estimated to make up about 50% of all loans. We disagree with the assumption that nationalisation would allow for all Greek problems to be solved with a scratch of a pen. 

    2. Exports

    Most supporters of the drachma ignore the impact an inflationary currency has on a country such as Greece, importing 48% of its food and 82% of its energy. Prices for indispensable products such as medicine or industrial spare parts would increase incessantly. Proponents of the drachma expect imports to fall, but in order for this to produce economic benefit this would have to impact on essential goods such as medicine or food at worse, too. It is indeed possible that such imports might decline. Price increases of those goods can lead to falling imports owing to the lack of demand from consumers in the country who are able to pay such prices. Given deficient production structures and the economic
    downturn associated with the Grexit, quick substitution of imports with local products is unlikely. Rather than correcting the balances of payment through exports, rising prices of important goods would merely exacerbate the deficit. Considering Greece’s high import levels, this might cause (imported) hyperinflation and a subsequent decrease in real earnings, weakening of the domestic economy and rising unemployment. 

    Exports (goods and tourist services) would indeed become cheaper. However Greece will not be able to live on olives, feta cheese and tourism alone, even if the prices of these goods fell by 50%. Greece’s export potential has only been marginal since the country joined the European Community in 1981. Barring some minor adjustments, structural weaknesses of the Greek economy have since consolidated.

    Greek economic structures make it highly unlikely that Greece would be able to overcome its crisis within a short period by means of export-led growth. With the exception of tourism and maritime transport, the Greek economy has been unable to offer competitive products and establish itself on the global market.

    Hence, the Greek economy is traditionally less focussed on exports. Only 33% of Greece’s GDP is accounted for by exports of goods and services; at 17.3%, Greece ranks third last in the EU with regards to exports of goods. It is important to note that Greece, a small country with a small domestic market, should engage much more actively in foreign trade than larger European economies.

    Wage cuts of an average of 40% over the past five years have not stimulated exports much either. They have not led to soaring exports as neoliberal ideology would have it. Unit labour costs fell by nearly 13% between 2011 and 2014, with exports even declining by 3%. This suggest that a rapid expansion of exports owing to further reduction in prices of Greek goods following the introduction of the new drachma is unlikely.

    Greece indeed has competitive export goods to offer, such as petroleum products, food, chemical products, non-ferrous metals and raw material. Greece even is the European market leader when it comes to primary products for the construction industry. All of this is little use, though, if the domestic economy is sluggish or even collapses.

    Greece is not a classical exporting country like German, for instance. 75% of the economic activity depend on purchasing power of people on the Greek domestic market. In 2014, Greece achieved a clear rise in exports of services at 11%, which was not only accounted for by tourism, one of the heavyweights of the Greek economy. These increases are insufficient to substantially reduce Greece’s performance deficits. Rather, the decline in imports of goods and services by nearly 35% since 2008 played a more crucial role, which limited the 2014 current account deficit to 2%. 

    Exports of services have traditionally been dominated by travel services (i.e. tourism) and transport services, nearly 90% of which are made up of maritime transports. The increase in exports of tourist services in 2014 again (meaning increased sales to foreign buyers) is largely due to falling prices and tax reductions.

    There is no doubt that tourism in Greece has great potential, however analyses of the Greek tourism industry show that too little has been invested in modern structures and offers over the past couple of years – in contrast to other Mediterranean countries which have been more successful in remaining competitive than Greece. Without an investment programme, exports will not boom. And under Grexit conditions, access to financial resources remains restricted. 

    3. Imports

    By contrast, prices of imports would presumably double. This affects products which Greece cannot produce itself or which are not produced on a large scale in Greece, as for example machinery, vehicles, IT technology etc. Much needed modernisation of Greek industry and, coupled with this, the creation of new jobs in this sector is practically beyond budgets. Greece purchases nearly as much food abroad as it produces domestically, and has to purchase 90% of its fossil fuels abroad. All of this would become considerably more expensive. Supply of medicine and medical devices would continue to pose serious problems.

    At the end of the day, an inflationary development of prices owing to expensive imports which might ultimately further weaken the domestic economy cannot be ruled out. 

    4. Debt

    Long-term debt management is the indispensable foundation to gain financial leeway to establish the infrastructure required and strengthen the economic structure using ‘fresh money’.

    The Grexit would not reduce Greece’s debt. No creditor in the world would simply convert Greece’s debt into drachma, i.e. practically halving it. This way, Greece’s level of debt would double in percentage terms and rise from 180% to 360% after the introduction of the drachma. It would be practically impossible for Greece to borrow money in the financial markets even at horrendous interest rates. This problem might be solved by means of a haircut (although it should not be assumed that such measures could easily be implemented unilaterally by Greece). But even then the country would be dependent on capital inflow from abroad to build and modernize its economic infrastructure. Following a haircut, international creditors would be extremely cautious in their dealings with Greece. There will be no swift supply of funds for the reconstruction of public capital and the renewal of potential capitalist output.

    For Greece’s economic recovery, the indebtedness of businesses is even more dramatic. It, too, would double in percentage terms. This would greatly impair the credit rating of businesses as well as relations with suppliers and buyers. Funding investments and deliveries of goods would be considerably more difficult, if not impossible. After all, who would want to do business with a company that is deep in debt and might go bankrupt any day?

    Even businesses that survive in such an environment will face double digit real credit interest rates. In addition, expensive insurance policies for currency hedging are required for borrowings used in the eurozone or the dollar area (now no longer merely as a speculative moment but because of looming further decline of the currency). 

    5. Social Consequences

    A return to the drachma would cause a sudden crash of the national currency: not only wages and pensions would be halved, but so would be savings, too. Following wage cuts of about 40% and pension cuts of about 44%, the question arises what people should live off then. The country would require comprehensive welfare programmes from Europe to address the worst humanitarian problems. Experts consider this to be far more expensive than restructuring of debt or relieving Greece of interest and debt repayments, for instance. Furthermore, such aid programmes are by no means investment programmes.

    With regards to businesses, relations of thousands of Greek companies with partners abroad would be severely strained. In addition to this, real currency reserves are required to ensure the normal functioning of the economy – at least until the production structure has recovered and been renewed. It is almost certain that given looming (national) bankruptcy and old loans, Greece would need new loans and would have to approach the IMF or a similar international organization for this aim.

    For the Greek, a default would have devastating consequences, while short-term effects on the eurozone as a whole could be contained. In the medium term, the eurozone, too, will suffer enormous political and economic damage. 

    6. Financial Markets

    Small and weak currencies hardly stand a chance trying to fend off speculation in the financial markets. Extensive foreign exchange reserves are required to shield a currency from depreciation and speculative attacks. As a country facing long-term high performance deficits, Greece does not have such reserves at its disposal. Hence, the Greek central bank would be unable to ward off such attacks on a new drachma. Even Germany and the UK had great difficulty fighting speculation against the pound and the German mark in the 1990s and were unable to prevent the collapse of the European Monetary System (EMS) in place at the time. Today, the financial markets are a lot more powerful, owing to 40 years of continuing redistribution of wealth from those at the bottom to those at the top. Every day, trillions of euros of speculative capital are being traded worldwide. Only about 1.5% of this amount serves to bankroll real production, trade or services. As a result of national insolvency and lengthy negotiations on debt restructuring, Greek would be at the whim of the financial markets for years. It is highly unlikely that the ECB would act as a guardian for the Greek currency – as most scenarios for an ‘orderly’ and ‘negotiated’ Grexit would have it – since it would undermine its own foundation.

    7. Greek Sovereignty

    A politically vital issue is the matter of sovereignty. Greece would be disenfranchised and would de facto cease to be a sovereign state. Foreign nationals, or the German government to be more precise, will in future determine Greece’s every move. By and large, this is true. Owing to the third memorandum, Greece has to fight through the reconstruction process with limited sovereignty.

    But again, we have to retort: To what extent would a nation such as Greece be sovereign outside of the European Union? This is not referring to the dream of some on the left who hope for Chinese or Russian funds and would gladly partially give up Greek sovereignty for this. The Grexit would in fact mean to surrender sovereignty to real markets. Reconstruction of public and private capital would take decades. Market forces would impose even more brutal austerity on Greece than now, which Greeks rightfully consider blackmailing. Trusting that a protracted crisis can be overcome within a capitalist system without a capable state is a dangerous illusion. 

    8. Opportunities despite the 3rd Memorandum?

    “If some people think that class struggle evolves in a linear way, that it’s won in one election and that it doesn’t involve constant struggle, either within government or in opposition, let them explain it and give us examples. We are confronting the completely new experience of a radical left government within a neoliberal Europe. But we can learn from left-wing government experiences in previous periods, and we know that winning elections does not mean that you get access to the levers of power from one day to the next. Waging a battle at the government level is not enough.
    It has to be waged on the terrain of social struggles.”[5] Tsipras’s statement is anything but an admission of defeat. It rather is an announcement claiming that the struggle will continue following the setback of 13th July – not only in government, but also on the social terrain. The problems that Greece is obviously facing, including a rigid state structures which have been abused by previous parties in government for decades to favour their cronies, or the gross social injustice from which the country had been ailing from long before the onset of the crisis, can only be solved by Greece itself. This struggle for the renewal of the country must remain the core aim of the Greek left. Leaving the eurozone might seem to be a radical move because it is an expression of protest against EU rulers. It is not, however, a solution to the problems Greeks are facing.

    How much leeway can be gained given the conditions stipulated in the 3rd memorandum is a matter of political negotiation and power relations within Greece as much as at the European level. If the revival of the Greek economy can be successful depends critically on whether the restrictive effects of the third memorandum can be contained and whether investments in modern structures can be strengthened. If the planned trust fund will cause a largescale selloff of public assets or if it will follow an ‘entirely different logic and functioning’ than the current TAIPED trust fund, comparable to Norwegian or Australian sovereign wealth funds – as the Greek Ministry of Finance claims – is the object of debates and discussions in ongoing negotiations regarding future action following the agreement of 13th July. It should be the duty of the German and European left to support Syriza in ongoing debates aiming to expanding political and social leeway.

    This article first has been published in German in
    Neues Deutschland, 12 August 2015

    Translation: transform! europe



    1. Interview with Giorgos Stathakis, Minister of Economy, Infrastructure, Shipping and Tourism, (in German) http://www.nachdenkseiten.de/?p=27024#more-27024
    2. Interview by Kostas Arvanitis (STO kokkino), first published in French in L’Humanité of 31st  July 2015, http://www.transform-network.net/en/blog/blog-2015/news/detail/Blog/alexis-tsipras-austerity-is-a-dead-end.html
    3. http://www.general-anzeiger-bonn.de/news/kommentare/pro-grexit-vor-chaos-bewahren-article1674626.html (in German)
    4. Even then, Germany would still profit from the crisis: According to reports by the Halle Institute for Economic Research, Federal institutions have saved around €100 billion since 2010 thanks to a sharp drop in interest rates on German government securities. This amount is at least in part due to the crisis. “These savings exceed the costs of the crisis – even if Greece failed to service their entire debt,” the researchers say in their study. http://www.nachdenkseiten.de/?p=27167#h01 (in German)
    5. cf. footnote 2

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