The case for Greece staying in the Eurozone

The debate on whether Greece should exit the Eurozone will almost certainly resurface in the run-up to the forthcoming elections in Greece. In the article below, Miltiadis Makris reviews the basic economic arguments in favour of a country’s Eurozone membership. He also argues that given Greece’s debt problems, the Eurozone debt crisis, and the characteristics of the Greek economy, Greece’s continuing membership of the Eurozone is in the interests of both Greece and its Eurozone partners. He finally discusses the issue of Eurozone members sharing the costs of resolving the Euro debt crisis, and why a quick solution to the crisis is very difficult.

The full article of M. Makris:

Eurozone (EZ) countries formally approved on Wednesday 14th of March a second, €130-billion, bailout for Greece that will keep the Greek government funded until 2014. This “historic agreement” came amidst many voices from academics and policy think tanks arguing that Greece may be better off by exiting EZ and regaining control of its (new) national currency. In fact, the debt crisis in EZ has given rise to a debate over the advantages and disadvantages of a monetary union membership, especially for countries such as Greece, Portugal and others.

This debate is not new. In the years leading to the institution of the European Monetary Union (EMU) there had been a heated debate on the pros and cons of a country entering a monetary union. This debate will almost certainly resurface in the run-up to the forthcoming elections in Greece.

The basic economic arguments in favour of entering EMU are:

Adopting the Euro will make it easier for businesses and consumers to compare relative price levels across member countries. That is, being part of EMU would increase price transparency. This will facilitate intra-union trade and increase the competitive pressures across member countries and markets. As this will lead to lower prices, entering EMU will potentially have gains in terms of consumer welfare.

A related argument comes from the fact that joining the Euro will reduce exchange rate uncertainty, and lead to lower transactions costs for companies and tourists. 
Membership of Euro can thus have a further boost in consumer welfare, directly through lower costs, or indirectly through higher corporate profits and hence paid dividends and corporate tax revenues. Reduced exchange rate uncertainty and transaction costs will also lead to increased trade flows. This will further stimulate competition in markets for goods and financial services.

The potential gains from lower transaction costs were estimated in 1990 by the European Commission at around 0.1-1 percent of EU GDP, with the actual savings varying with the size of the countries.

Estimations of the gains in terms of increased trade flows vary. However, even conservative estimates point to significant trade gains. For instance, research in 2001 by T.Persson and co-authors, which that corrects downwards earlier work by A.Rose and (joint work with) J.A.Frankel, find 60% trade gains in the long run from joining EZ. Under a 2002 estimation by Frankel and Rose that 1 percent increase in total trade (as a share of GDP) raises per capita income by 1⁄3 of 1 percent, we thus have that adoption of Euro could potentially raise GDP in the long run by 20 percent. The UK government estimated also in 2003 that if UK were to join EMU, and certain flexibility and sustainability requirements were met, it “could enjoy a significant boost in trade with the euro area of up to 50 percent over 30 years and that UK national income could rise over a 30-year period by between 5 and 9 percent.” Even after restricting attention to short-run gains and of materialised gains by EZ members so far, Euro adoption could raise GDP by 2 percent over 20 years.

The increase in competitiveness by joining the Euro will also increase businesses’ incentives to innovate and invest in R&D. Higher investment will enhance productivity. Higher competitive pressures due to increased trade flows could also help to promote supply-side reforms in member countries and encourage specialisation, which will further increase productivity.

By removing currency barriers to trade, a country potentially faces improved access to foreign funding. Thus, EMU could also facilitate investment flows within the EZ.

Membership of a single currency area increases also the competition for inward investment both from within and outside the EZ. Such competitive pressures will further increase the scope for supply-side reforms and, in particular, for enhancing the flexibility of labour markets. The reason is that flexible labour markets are highly effective in attracting foreign direct investment. In a study by the UK Department of Trade and Industry of primary data, generated from a questionnaire distributed to 1800 trans-national companies, all of whom possess existing production facilities in the UK economy, it was found that “labour market flexibility identified as representing moderate or high degree of importance by 60 per cent of respondents.”

An increase in inward investment and the enlargement of markets will also imply an increase in the productivity of labour. Thus, EMU membership will also lead to higher wages and employment, and hence to long-term benefits for households.

Taking this broader (and harder to quantify) range of benefits into account, recent studies that focus on Central European countries, specifically on Hungary and Poland, find that adopting the Euro could add 0.3–0.9 percentage points to average GDP growth for 20 years.

In a monetary union, inflation is the responsibility of an over-arching central bank – the European Central Bank (ECB) for the case of EMU. Because of this, monetary policy may not always follow narrow national interests. In this way inflation is insulated from national politics and electoral cycles. This delegation of monetary policy will thus enhance price stability and maintain interest rates at low levels, and hence further boost investment. These effects have been more than obvious for countries such as Greece and Italy. For instance, the nominal interest rate on 10-year Greek government bonds dropped from around 20 per cent in 1994 (when it was announced by the government that Greece will aim at entering EZ in 2001) to less than 3.5 per cent in early 2005. Inflation, which averaged almost ten per cent in the decade prior to EMU entry, was only 3.4 per cent on average over the period 2001 through 2008.

However, economic reality is often much more complicated and unpredictable. For instance, politics play a central role on the kind, if any, of reforms that a nation adopts. Interest groups such as labour unions may be strong enough to block reforms that run against their interests. Existing institutions and bureaucracy could also hinder the administration of policies, and prove to be an important obstacle for inward investments. Consumers and national governments may abuse the availability of loans at low interest rates. Banks, in the face of competitive pressures, may adopt practices that involve excessive risks. Recessions occur, and can hit countries differently depending on the flexibility of existing institutions and the sector-specifics of economic downturns. These are not arguments against EMU membership per se. Rather, they are reasons why materialisation of benefits can delay, and why countries might need to delay entering EZ until their economy has been adjusted and prepared for entry. They are also reasons for increasing fiscal cooperation within EMU, and harmonising tax and pension systems.

For many experts, a combination of the above factors has been the main contributor for the debt crisis in EZ. What is interesting, however, is that this crisis has also brought up some (new) arguments for why exiting a monetary union can be very problematic, especially in times of economic distress. We outline these arguments with reference to a Greek exit, though many of them apply also for other EMU member countries such as Ireland, Italy, Spain and Portugal.

To start with, exiting EMU would have an irrecoverable damage on the credibility of the eurozone. A pre-requisite for the achievement of currency certainty we have discussed above is that markets perceive the exchange rates between member countries as permanently fixed. Having a country exiting the EZ would mean in effect that exchange rates within EMU are not permanent, with profound consequences for price transparency, levels of exchange rate uncertainty and transaction costs, and thereby for trade flows and competitiveness across EZ.

Another major damage of Greece exiting EMU would be to the credibility of the bailout process. Markets would start questioning the ability/resolve of eurozone politicians to manage the Portuguese, Irish, not to mention the Spanish and Italian crises. The bailouts of Portugal (€78bn in May 2011) and Ireland (€85bn in November 2010) were designed to assist both countries until they could borrow in the markets again, just as with Greece. Investors may thus question whether the same solution will work for the other bailout recipients. The borrowing cost of these countries will skyrocket to the levels Greece has been experiencing for the last two years, making a default by these countries a foregone conclusion.

If Greece reintroduces the drachma, everyone in EZ could be affected. Any unilateral exit from EMU would prompt panic in other EMU countries that are in trouble. Citizens in countries such as Ireland could easily assume that their governments might follow suit, with negative consequences for consumers’ confidence in keeping their money domestically.

A new drachma would devalue to such an extent (more than 50% according to some experts) that the Greek debt liability (around €260bn after the recent “haircut” of 105bn Euros) would explode, given that Greek debt is denominated in Euros. In all certainty, this will lead to a default on Greece’s public debt, which will cost the Greek banks around €30bn (taking into account the recent “haircut” of 50% on average).

The chain reaction will be profound. The ECB will have lost around 150 billion Euros (because of money owed by the Greek banks and the Greek bonds that ECB has purchased since May 2010). EZ member countries will have to recapitalise the ECB. There will also be a very high risk of a domino effect onto Eurozone’s banks, as they own a big share of the Greek debt as well as of (private) debt issued by others who have lent to the Greek government. According to figures from the Bank for International Settlements, when you add in other forms of Greek debt, such as lending to private banks, pre-haircut exposure of private banks amounts to $14.6bn for the UK, $34bn for Germany and $56.7bn for France. Even after taking into account of a “haircut” of 60% on average, it is clear that a domino effect will give rise to additional debt problems in EMU and additional pressures for propping up private banks across EZ. Economic activity will plummet across EMU and by implication the European Union (EU). Countries across EU will face an unprecedented recession, with countries such as Germany and UK hit the hardest due to their high volumes of trade  (around 40% of trade) with (other) EZ countries.

In addition, the remaining currency union will be left with a Euro whose value will skyrocket, propelled by the collapsing exiting economies and an ensuing currency war. This will lead to a massive drop in the exports of Germany and its remaining partners, and a further dip in economic activity.

To make things worse, a Greek exit could increase free-riding behaviour within EMU, as other countries might perceive that it is possible to run excessively expansionary policies and subsequently exit the currency union to devalue their debt.

The above effects on EU and EMU countries of Greece exiting EMU in the current economic environment lie, in fact, behind the two bailouts of total value of €240bn offered to Greece to date. They also lie behind voices within Greece that urge for a return to drachma, hoping that such a threat will force Germany and other “like-minded” countries that push for strict austerity measures to accept bigger losses for their banks and taxpayers, and support alternative measures such as the introduction of a Eurobond.

Preventing similar “hold-up” problems in the future by EZ member countries can explain the hard stance many fiscally disciplined EMU members have adopted against Greece. However, another reason for this could also be that a threat of Greece exiting EMU may be “empty” because of the catastrophic consequences such decision will also have for Greece.

Following an exit from EMU, there would be a significant increase in exchange rate uncertainty vis-à-vis the eurozone, which would imply a loss of inward investment funds and hence a significant decrease in wages and employment. Reintroducing the drachma would also have negative implications for price transparency. Competition and productivity-enhancing investment would thus suffer.  Long run inflation rate would once again be under the control of domestic politicians (as it was prior to joining the Euro) and hence prone to electoral incentives. Indicative of this is that the Greek inflation rate was over 20% in late 1980’s, following overly expansionary monetary (and fiscal) policies prior to national elections.

Capital controls would have to be introduced to prevent the movement of Euros outside Greece in the run up to re-introducing the drachma currency. This would call into question the country’s EU membership itself and the loss of all the socio-politico-economic benefits that come with such membership. Benefits that are well accepted even by countries who doubt the desirability of EMU.

Greek politics have been marked by a drive to bring the country closer to Western Europe than Eastern Mediterranean. Therefore, exiting the Eurozone and not being at the core of European integration would be seen as a political suicide.  Greece would loose its status as a major investor in Balkans and Eastern Europe, and hence as an important actor in this volatile region. For example,12% of foreign direct investment in FYROM in the period 1997-2009 was Greek, while Greek investments in Serbia, Bulgaria and Romania total at around €6bn. Accordingly, factoring in the geo-political characteristics of Greece and their interaction with its neighbours’ EU membership should be enough to send shivers down the spine of Greeks.

As we have already mentioned, exiting EMU would almost certainly be followed by a default, which would also be catastrophic for the Greeks themselves. A default would cut off rescue loans from the EU and IMF to the Greek government, and from the ECB to the Greek banks. The key observation here is that the Greek government has consistently been earning less in tax revenues than spending (even after excluding debt payments). As a result, the Greek government would be unable to pay for basic functions of the state (though Greece’s primary deficit has been decreasing lately following the austerity measures of the last two years – currently being at around 2% of GDP). This would bring about more revenue-raising measures, and a further massive blow to domestic activity.

More importantly, the Greek government, having no access to external funds, would have no money to rescue Greek banks. The economic upheaval by a bank run (or rather the prevention of it by banning withdrawals and freezing banking accounts) on exiting EZ would be devastating. The collapse of the banking sector coupled with the shutting down of basic state operations would push the country’s economy even deeper into recession. Tax coffins would drain and spending on benefits would plummet bringing even more despair to the less fortunate economic groups in Greece.

To make things worse, Greece’s current account deficit, which measures the trade deficit, is currently around 10% of GDP. That is, Greeks spend around 10% more than what they earn from selling their own products abroad, and all this despite the spending cuts in the last two years. This is a symptom of low competitiveness, which as we have hinted earlier is a result of a badly organized domestic bureaucracy, very strong unions and interest groups. In fact, in the period 2001 – 2009, competitiveness declined by around 20-25% (with the lower number corresponding to a measure by consumer prices, and the higher number to a measure by unit labour costs). A current deficit requires an economy as a whole to attract an equivalent amount in financial investments from abroad. Such investments take mainly the form of lending. Crucially, most of the Greek current account deficit consists of imports of basic goods that are not produced domestically and of necessary inputs for domestic production such as fuel, chemicals and machinery. Therefore, having no access to external funds would paralyse the country in the short run.

And this onerous situation would continue for as long as the much needed supply-side reforms do not take place, unless the Greek government allows the (new) drachma to plummet vis-à-vis other currencies in an attempt to regain competitiveness and eliminate its current account deficit. Nevertheless, though this might seem an attractive option, it would be an extremely painful one.

Import prices and inflation will skyrocket. An example of what may happen comes from the 2008 banking and currency crisis in Iceland. The Icelandic krona lost around 40% of its value in one summer. Interest rates reached 15%, and inflation climbed at 14%, very quickly. In fact, many economists do expect a rapid devaluation of the new drachma of at least 50%. Living standards would be hit hard, as Greeks would be rushing to spend their drachmas before their value erodes further due to subsequent devaluations and increases in the inflation rate.

Of course some could argue that these short-run costs will soon be outweighed by the increase in competitiveness, the attraction of foreign investment and the return to positive growth rates. However, modern Greece is mainly a service economy: agriculture accounts for 3.6% of GDP, industry for 18% and services for 78.3% (2011 est.), The main sector that would benefit from an episode of severe devaluation would be the tourism industry that accounts for roughly 20% of GDP. But there are limits to how much the tourism industry can expand and absorb, especially in the face of similar incentives on the part of Portugal and Spain, and fierce competition by other Mediterranean countries. Unless the necessary reorganisation of the Greek state takes place and labour markets become more flexible, it is hard to argue that Greece has any credibility in terms of attracting foreign investment.

I have argued that the economic effects of Greece exiting EMU will be devastating both for Greeks themselves and their European partners. However, paradoxically, it is the nature of these effects that makes a quick solution to the debt crisis in the Eurozone very difficult. One – unfortunate – reason is that a divide between North and South Euro members seems to have emerged with each side trying to avoid bearing the biggest part of the costs that are needed to resolve the crisis. Another reason is the complexity of the situation with various proposed solutions often having counteracting effects on different dimensions of the problem. In any case, I do hope that Europe comes out stronger from this crisis.

About M_Makris

University of Southampton

This entry was posted in Banking and finance, Europe, Public finance. Bookmark the permalink.

12 Responses to The case for Greece staying in the Eurozone

  1. M_Makris says:

    I didn’t misunderstand your point on Iceland. What I contest is your belief that the Greek economy (and political situation) is such that the short-run costs will be lower than the long run benefits of a return to drachma. Again, fir this, please refer to the relevant paragraph in my article (and my discussion on the “traditional” arguments in favour of a monetary union, for the long-run benefits of such institution).

    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!

  2. Chris says:

    Thank you for the response to my comment and the clarification on the default mode your article implied. Though I have to say it was not necessary since I believe both of us agree that the only way for an exit to have a “positive” effect would be through negotiation and under a common strategy by all EU partners (especially when it comes to loan payments).

    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.

  3. M_Makris says:

    Dear Chris,

    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

  4. Chris says:

    The first part of the article takes us back to the 90’s and the discussion on the adoption of a common currency, presenting the positive side the Europeans had in mind. What really escaped the creators of EMU and escapes the author’s view, is that the common currency was never ready for a crisis of any kind, as it never constituted an optimum currency area (as defined by Mundell).

    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.

  5. Demetrios Papaeconomou says:

    In my opinion, the single most important argument in the economic debate regarding Greece’s eurozone membership, is not economic at all. It is mainly political. Outside the eurozone, Greek politicians would never choose to reform. Why step on vested interests’ toes, when they could simply devalue or print inflation? Proponents of the return to a national currency tend to miss the whole point: The Greek authorities had to be effectively blackmailed in order to start doing elementary things, like counting the number of public servants for God’s sake. Once the pressure for reform is lifted, all hope of ever becoming a modern European state will evaporate. In this respect, Greeks should welcome the eurozone straitjacket.

  6. Evangelos says:

    Surely we can agree on that.
    Maybe I don’t pay enough attention to the potential cost of exit,but I m very confident about the cost of remaining in the eurozone.

  7. M_Makris says:

    Let’s agree that we evaluate differently the relative costs and benefits of exiting the Eurozone.

  8. Evangelos says:

    Dear M_Makris,

    I work in the agricultural section and I can ensure you that the european subsidies was a major disaster.Firstly because many farmers were forced to abandon their jobs (“posostoseis kalliergeias”etc.),and secondly because the rest were led to cultivate only subsidized stuff like cotton.

    Last but not least,from now on the eurozone promises only pain and austerity that no sane politician will try to impose on his country.Germans are asking salary raise over 3.3%,imagine their reaction if you cut them >40% and then raise their taxes every three months!

    I m not against reforms (not at all), but really against the eurozone,Greece really needs to stand on its feet,no more subsidies for german machinery,weapons and “services” (corruption).

  9. M_Makris says:

    Dear Evangele,

    I believe you are confusing the Eurozone with the EU. Are you suggesting that Greece should exit EU (and hence the Eurozone)? All the subsidies all these years in support of the agricultural sector and the building up of infrastructure are from EU funds, to mention only few of the advantages of EU membership.

    Even if “the whole troika program thing its just about saving German banks”, I still believe – and I have outlined the arguments in my post – that the costs of exiting the Eurozone are very high to make an exit the least preferred option.

    M.Makris

  10. Evangelos says:

    The eurozone is just a free-trade zone which benefits the most productive and competitive members of it.
    Greece has no serious benefits from it anymore,receives zero military or even moral support,and the whole troika program thing its just about saving German banks.
    Greece should exit as soon as possible.

  11. M_Makris says:

    Dear Klaus,
    I don’t think I fully agree with you statement that “for many year now, foreigners have funded the Greek living standard”. The current account deficit is made out of imports, which in turn provides a source of income for the foreign exporters.

    Moreover, a very by part of imports is from EU countries and hence cannot be restricted by means of import taxes. Similarly, capital controls cannot be imposed for intra-EU capital flows.

    Therefore, it is reforms that are required. Reforms that will increase competitiveness and make labour markets more flexible.

    M.Makris

  12. Greece should definitely want to defend her membership in the Eurozone with everything she’s got! Even though the living standard will decline much, much more still, membership in the Eurozone gives Greece the hope that it will stabilize, albeit at a lower level than today.

    The key issue is the current account balance. For many years now, foreigners have funded the Greek living standard (roughly 220 BEUR alone in the last 10 years). That’s a trend which can definitely not go on forever. First of all, Greece must try everything possible to attract foreign investment. Secondly, increasing exports must be made a top priority. And, import substitution must be focused on and some instrument for curtailing imports must be found (special taxes on luxury goods?).

    One thought would be to temporarily (for a few years) simulate a situation as though Greece had returned to the Drachma (import taxes; capital controls). There are surely many other thoughts. Below is a paper which I wrote about this last year.

    Whatever is done, the current account must be brought into balance.

    http://klauskastner.blogspot.com/2011/09/endgame-for-greece.html

Leave a Reply