My former colleague Costas Lapavitsas published a piece in Le Monde Diplomatique arguing in favour of Grexit. While I respect Costa’s academic work (his public appearances and pronouncements do not do justice to his research output) I disagree with him.
What follows is a point by point deconstruction of his argument. Costas considers Greece dysfunctional and the Euro defective. He proposes that
There are only two ways out: either the EMU must be completely overhauled, or Greece will have to consider defaulting on its debt and leaving.
Greece is dysfunctional, and the Euro contains some significant structural weaknesses (that are well explained in the literature). However the choice of EMU reform or Grexit conflates the two issues. While the structural weaknesses of the EMU need to be addressed and there are measures under discussion (banking union, fiscal coordination, debt breaks etc), Greece’s problem and future is not dependant on this external reform. Greece’s problem is primarily internal. As Costas well knows, even comprehensive debt cancellation will lead the Greeks to ask to borrow again as the country is unlikely to achieve balanced budgets without harsh austerity (the same austerity that Costas and the Left Platform decry). The dilemma is not Grexit vs Euro-reform.
Costas argues that
Greece’s fate was sealed in 2010, when the EU chose austerity as the main solution to its problems, with wage cuts, spending cuts, tax increases, pro-market reforms, and the institutionalisation of austerity through measures such as the Six-Pack and the Two-Pack.
One could argue that the choice of this particular type of austerity (tax heavy, reform light) belonged to the Greek government of the time (Papandreou) who went after the easy targets (VAT, horizontal wage and pension cuts) rather than the tough ones (structural reforms, corruption, tax compliance). We can debate whether pro-market reforms are ‘legitimate’, but this is how the EU operates and this is not new. Capitalism is embedded in EU structures for better or worse and complaining about it in a Grexit context does not seem to have much analytical value.
Of the negotiation, Costas says
[Syriza] has been attempting to negotiate a deal for the lifting of austerity measures, debt relief and a programme of investment to boost the economy. The response of the creditors in June was ruthless…
This conveniently ignores what happened between January and June. Prof Varoufakis had multiple opportunities to sign something better than the June offer, yet he didn’t. Easy to blame the (hard and wrong) position of the Germans, forgetting to mention that Syriza squandered any good-will that existed in its first couple of months of government.
Costas prediction for a future of ‘compliance’?
The ensuing geopolitical weakness is easy to imagine: Greece will dwindle into historical irrelevance.
When political economists start talking about ‘geopolitical’ significance, it is time to change the channel. Greece is irrelevant to everyone but the Greeks. Europe has been busy insulating itself from the Greek crisis and the fantasy that if we blow ourselves up we will take Europe with us persists only in the mind of Lafazanis (and Kammenos). Yes, a Greek implosion will not be good for anyone, but it will be worse on the Greeks.
From this point onwards Costas enters ‘dream mode’
If the EU insists on imposing these policies, Greece’s survival will mean defaulting on its debt and exiting the EMU as the first step towards reviving its production structure, boosting investment and restoring the welfare state.
Ok, lets default on the debt and Grexit. Greece will revive its production structure? Really? Such as? Industrialisation from scratch competing with China sounds plausible Professor? Boosting investment? Hm, ok, why would that be better outside the Euro exactly? Will Greece establish special FDI zones? And restoring the welfare state? With funds from where? Lovely stuff this. I often have dreams too, but then I wake up. I have discussed in the past what Greece could wake up to, but it is nice to dream.
Further down Costas stumbles onto things he knows nothing about and gets them wrong.
The legal basis for this is straightforward: the treaties already include provision for exit from the EU. What applies to the whole (EU) would apply by analogy to the part (EMU).
Let me summarise: WRONG. Read here for the correct interpretation of the Treaty framework.
Costas is correct on debt, but forgets to mention that private debt to foreign entities will remain denominated in Euros.
Greece would suspend payments on public debt abroad — mainly to the International Monetary Fund and European Central Bank (ECB).
Remember what happened to those who had taken mortgages linked to the Swiss Franc? Imagine this a million times over, for everyone. But this is not the fun part. The fun part is what will happen to Greek bank depositors.
The Greek banking system would be nationalised and new, sound, banks established. Provision would be made for restructuring problematic business, housing and consumer loans which have accumulated during the crisis and currently exceed €100bn. Capital and banking controls would be established, along the lines of EU controls on Cyprus in 2013, but without a haircut on deposits. Bank deposits and loans governed by Greek law would be converted to the new drachma at a rate of 1:1.
No haircut on deposits is unlikely to be much consolation for those who had their nice Euros turned into useless Drachmas. 1:1 you say? No haircut you say? Ok, lets imagine you have 40.000 Euros in the bank. I will change them for 40.000 bananas, but the whole banana! Happy? But maybe your Drachma bananas won’t be useless?
The new drachma would be devalued, probably quite significantly, in the first few weeks, and perhaps stabilising at 10-20% below par value after several months
Greece has no foreign currency reserves to support the new currency as Chryssogonos explained. The new Drachma as every analyst expects will plunge, losing more than half its value almost immediately. This is not a haircut? But fear not, says Costas, we will give you ration cards if it gets bad!
The needs of vulnerable social groups would be prioritised for key goods — especially petrol, food and medicine — but a minimum of preparation should make ration cards unnecessary.
How long will it take for things to pick up again?
The economy would be likely to go into recession during the adjustment period, which would probably last several months.
Again, Costas enters REM mode. For months read years, many years. Reason is that even if we agree to disagree on the economics, we cannot disagree on the politics. Syriza cannot manage a transition of this magnitude. No one can. Greece will disintegrate into chaos, long before recovery could return.
Europe is being slowly throttled and needs a jolt to bring it to its senses. Throughout history, Greece has often played a role disproportionate to its size. This may be another such occasion.
This is the crux of the matter. Costas and the left are willing to sacrifice the Greek people to make a point. Anyone up for the role of sacrificial lamb?