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On my last paragraph in my comment: if one agrees that the costs of a significant depreciation will be massive for Greece (given that we are an importing country, and tourism is a small proportion of our «production», as well as under-developed for international standards and under fierce competition by countries such as Spain, Turkey e.t.c.), then the only other way to «close the fiscal/trade gap» is by taxation under an exchange rate peg (or under a programme of moderate devaluations). Given widespread tax evasion, the tax must be lump-sum, and hence a head/poll tax would be required (which is politically costly due to its burden on the lower-income households). So, I hope you can now understand my point, and maybe calculate that number.

Finally, an exit would indeed give some room for the necessary reforms to take place in a more gradual and mild manner (at the cost of a mix of devaluations, high inflation and taxation). But these would require, as you correctly hint, the existence of decent politicians who are willing and can bring these reforms forward, alongside, I would add, the existence of political support for such reforms. Given the Greek experience on this front the last few decades, let me have very serious doubts on this – though I would be the first to celebrate if proven wrong on this!

Now on the points you made in your response:

I never claimed that the return to sovereignty will be problem free. We certainly agree that inflation and depreciation will occur (though inflation won’t be as high as one may thing, bearing in mind the unemployment rates).
Concerning Iceland I believe you totally misinterpreted my point. You refer to short run implications, while my point is definitely on the long run side. Accordingly Iceland’s current data was mentioned as a proof that inflation could be a rather temporary anomaly than a permanent situation, (obviously I am not dreaming of heaven when considering the return to sovereignty).

Nobody claims the reforms are an easy task, especially when it involves a radical change in production and structures. The difference is the sacrifices made and the policy margins allowed, which under the EURO regime are heavy and inexistent respectivelly. A focus on fiscal and budgetary discipline at a time when both public and private sector are deleveraging has historically proved to be catastrophic.
Your last paragraph is almost incomprehensible to me. It refers to either a state operating under the gold (or euro for that matter) standard or under peg exchange system.
But under a fiat currency regime with flexible exchange rates the state is the issuer of money and has no restraints what so ever on spending. Therefore taxation has nothing to do with funding the public spending despite the common belief on the subject (you will find MMT very interesting on this, though I am certain you are aware of it).
To conclude, I am a proponent of a greek euro-exit (not talking about disorderly default either), not because I consider it to be the perfect “harmless” solution, but because it will provide the greek state (hopefully run by decent politicians) with the means to make the necessary reforms in a more gradual and mild manner.

First, when I refer to default, I mean disorderly default. I hope this clarifies various points in my article, and I do apologise for this ambiguity in my article.

Second, I strongly believe that Greeks should also care about the wider implications of a Greek exit and a (disorderly) default on EZ members as these are (and will be) framing any negotiations between Greeks and its partners.

Third, constructive dialogue requires respect for the others’ opinion even if it is not to our agreement. I am happy to debate whether my «…insight on the fundamentals of economy…» could be better, or whether my «…article is a bit shallow …» or not, but doing this would first require a more careful reading of my article on your part. I explain:

I am fully aware of the drawbacks of EMU in its current form. To convince you on this, I suggest you read the paragraph of my article starting as «However, economic reality is often much more complicated and unpredictable. …»

I agree with you that the situation of the Greek banks is very serious, but I believe that it would be far worse after a disorderly default. In fact, I also agree with you that the finance of a credit institution will not be a problem for a currency issuer, but I disagree that it will be problems-free. The financing of the banks, and the Greek state in general, with new issues of currency will lead to severe inflation and depreciation as I have argued in my article. This brings me to my next point.

Thank you very much for updating me on the current inflation and interest rates in Iceland. But, I would suggest you read again the relevant paragraph in my article to see that I was referring to the period immediately after, i.e. to the short-run implications of, the default in Iceland.

You seem to agree that there will be negative implications in the short-run from a default by the Greek, but you also seem to believe that these costs will only be temporary, by referring to «…GDP growth, exports and the needed reforms on the economy…» I will agree with you for the urgency of reforms. But if the necessary reforms are easy to be implemented why haven’t they taken place these two years of the crisis? For a related excellent point please see the comment below by Demetrios Papaeconomou. Regarding GDP growth and exports, I would again urge you to read the paragraph of my article beginning with «Of course some could argue that these short-run costs will soon be outweighed by the increase in competitiveness…»

Finally, I don’t live in Greece, but my parents, siblings and many of my friends do, and so I am aware of the precarious situation in Greece. (To avoid unnecessary exchanges with readers, my brother is a taxi driver and I have friends who are civil servants, self-employed as well as unemployed.) But I also strongly believe that they (and most of Greeks) would be far worse off after a Greek exit and (disorderly) default. Since you seem to be knowledgeable and have access to good data, I would recommend you make the following calculation to see if you can convince yourself of this. Take the current primary deficit and divide it by the registered labour force. Given the widespread tax evasion problems, and the serious problems of inflation and depreciation I have emphasised in my article, the number you will find must be a poll (head) tax imposed on every member of the labour force (that includes the unemployed as well!) on top of the existing (admittedly severe) measures, to finance the operation of the Greek state (schools, hospitals etc.) for as long the primary deficit exists and the necessary reforms (that include those aimed at resolving the tax evasion problems) do not take place! If you still think that Greeks would be happy to pay this price to exit EZ, then let’s just agree that we evaluate the relative costs differently.

Kind Regards,

M.Makris

The second part discusses the consequences of a Euro-exit.
I m not going to debate the ones regarding the effect on EZ. As a Greek citizen it really concerns me far less than the possible impact on the domestic economy. More importantly I do not consider the EZ a viable concept any longer, at least judging it by its current merits. Price transparency, inflation policies etc.mean nothing to a zone that just reached its highest unemployment numbers in a decade. Three member states in default, others in financial turmoil, well there must be some kind of a problem with this union, far more severe than the need to maintain price stability.

So which are the author’s arguments against a return to sovereignty, (excluding again the EZ consequences)?
First of all the default on public debt. Though not inevitable, I have to agree that it is the most probable scenario. However I would like to remind the author that the bail-out program, no matter how the EU leaders would like to name it, means default. So nothing new there. Greece is out of markets and will be at least until 2020.

Then it’s the Banks argument. I would like to remind you that the Greek Banks already face severe problems. Apart from the PSI losses, they are effectively out of the interbank market, their collateral is considered by the ECB close to garbage (huge haircuts), and the use of ELA by the Greek National Bank has made borrowing far more expensive than their European counterparts. Not to mention the rapid growth of unpaid loans and the negative credit expansion, as a result of the austerity policy. So when we refer to problems in the banking sector, well the problems are already present (check Target 2 accounts).
Concerning their recapitalization, you neglected to mention that it is designed to take place under new loans to the Greek State . How this continuous rise in public loans is in favor of a state that is a currency user and not an issuer, beats my mind.

“More importantly, the Greek government, having no access to external funds, would have no money to rescue Greek banks”. If you refer to the current EZ membership status, you are dead right. But as an issuer of currency you can not really believe that the finance of a credit institution will be a problem of any kind.

“Import prices and inflation will skyrocket. An example of what may happen comes from the 2008 banking and currency crisis in Iceland”.
You really need an update on your data. The current inflation rate is at 6,4% and the interest rates at 5% (numbers talen by tradingeconomics.com). Iceland is already out of the rough patch and its’ economy is in growth. Yes the exit and the subsequent denomination will cause temporary inflation and make the imports expensive. But the first part can be controlled, especially when combined with GDP growth, exports and the needed reforms on the economy structure, while the latter is already in free-fall due to lack of consuming power. After all what isn’t this the target of the current fiscal policy? Surplus on external accounts?

“Living standards would be hit hard”. You obviously don’t live in Greece otherwise you would not have written that. This is the fifth year of contraction in Greece and the projections of IMF and Troika seem to indicate further depression in the coming years. Unemployment has reached 20% and the minimum wage has dropped to 400 €. Not to mention part time employment etc.

In conclusion, I consider your article a bit shallow (no offense). If written by someone in Germany trying to maintain today’s status quo and scare Greeks out of the thoughts of sovereignty, I would understand it. But coming from a Greek, I would expect at least some better insight on the fundamentals of economy.

Paul Thomsen on his 27.03.2012 address to the European Parliament makes clear that it is the Greek authorities who chose the fiscal policy mix:

http://s1066.photobucket.com/albums/u420/drmits1/?action=view&current=Thomsen27-03-12EuropeanParliament.mp4

(Paul Thomsen, at the European Parliament, 27-03-2012):
http://s1066.photobucket.com/albums/u420/drmits1/?action=view&current=Thomsen27-03-12EuropeanParliament.mp4

1. As long as markets are dominated by monopolistic structures, WAGE cuts in the private sector do not lead to PRICE cuts. They simply lead to higher profit margins. The troika make explicit note of this in both, the 1st and the 2nd Economic Adjustment Programmes for Greece.

2. Wage inflation in Greece over the past 10 years has been driven by the PUBLIC sector, not the private sector – and especially not the tradable private sector. (reverse Balassa-Samuelson effect)

Most crucially though, Greece has been accumulating deficits in the trade of goods. Trade in services has been registering sizable surpluses, which averaged +7% of GDP between 2000-2009, which is the 5th highest in the EU! (Non-tradeable services are a different story, of course…)

So, regardless of where you choose to spend your holidays, Greece’s competitiveness issues do not lie with tourism, nor with wages paid within the tourism industry. They lie with uncompetitive market structures – including in non-tradeable services -, excessively high admin burden and, tons of goods imports, afforded chiefly by generous wage increases in the public sector.