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.
Costas ends
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?
@iGlinavos
iGlinavos education 
Original I thought, well if the Greek want to leave, let them if that’s what they desire. There is life outside the euro as well.
But, having read this,
http://www.nakedcapitalism.com/2015/07/bank-it-grexit-and-systemic-risk.html
LikeLike
I think they should think twice.
LikeLike
And then there is of course the rather relaxed attitude about what would happen after you declared default.
Unless Greece want to go on as some sort of pariah in Europe it has (sooner or later) come to some agreement with is lenders. It might well be that’s its lender eventually will agree to some sort of debt-relief, but then again, they might not and keep Greece out in the cold until full payment will be agreed upon.
It’s true, a country cannot go bankrupt in the sense that a curator comes in and sells everything you got, so Crete will remain Greek.
But lenders can surely make your life miserable, which of course will frustrate all the wonderful objectives you might have formulated.
Having said all that, I still think that every country within the Eurozone should have the right to leave the union in an orderly fashion. Declaring default is of course not a orderly fashion.
LikeLike
Furthermore there is the myth of the unsustainable debt that Yanis is entertaining. On Dutch TV Dijsselbloem claimed that this was only true for the short term, but on the long run (thanks to the earlier “haircut”) Greece could easily serve their debt.
Erik de Sonville was kind enough to provide me with a link that confirms this.
http://www.telegraph.co.uk/finance/economics/11372369/Three-myths-about-Greeces-enormous-debt-mountain.html
It illustrates that Greece has negotiated lower interest payments than Spain, Portugal, Ireland and Italy.
So what is there to complain. The using of FIAT money means of course that no country ever will attempt to become without debt. This is a house of cards we should really worry about and there is already a small section of the public that does, but that is not ideological driven.
So it’s not the level of debt that should be the main concern, but the speed in which reforms are introduced.
LikeLike
“The using of FIAT money means of course that no country ever will attempt to become without debt. This is a house of cards we should really worry about and there is already a small section of the public that does, but that is not ideological driven.”
Pim, if I may “mis”use your comparatively advanced economical knowledge* again?
I am not sure if you ever looked into Yanis “grand economical theories”. Strictly I should be a potential fan of his, considering my hesitations about economics. I am a fan of humans and their histories and much less of “the capital”. But the latter results in the simple fact that I neither would I like to condemn the people that hold it collectively. In this case my much stronger interest in humans wins the day.
But strictly based on random synaptic association, wouldn’t “FIAT money” fit, although not quite mentioned, into the larger historical context of his 1970s obsessions? At least as far as his “Grand Hoover” theory from 2010 goes. Meaning the US sucking in all the world’s money?
Now I would like to ask you were the bondholders of state “fiat” money still the most prominent issue in 2010 when his “Grand Hoover” narrative, the world sucking in all the world’s money” surfaced?
* I know I don’t understand much in the field of economics, but I underwent absolutely limited studies that taught me the necessary basic rules to understand e.g. “leverage capital”. Since I always found humans more interesting the accompanying field of law I had to study in that context, was a lot closer to my heart. And yes, thus got a lot more of my attention.
LikeLiked by 1 person
Sorry, mistake. Strictly, I haven’t decided how to respond. Maybe I read it again and then decide which of the copied passages while reading may be the most important for this unimportant human voice.
Anyway correction:
“Grand Hoover” narrative, the world sucking in all the world’s money”
“Grand Hoover” narrative, the US sucking in all the world’s money”
LikeLike
@LeaNder,
Could you provide me with a link where to find this great Hoover narrative?
I’m not sure that the US is sucking in all the worlds money.
However, the US dollar, being the worlds reserve currency enables them to suck in all the raw materials in exchange for a piece of paper called US dollar, which they can print in unlimited quantities.
LikeLike
On fiat currency and the nature of modern money see https://iglinavos.wordpress.com/2015/03/02/money-there-is-no-such-thing-as-money/
LikeLike
Thanks, Iannos, looks interesting. I’ve stumbled across a link to some of your articles and wondered if there was a book too. 😉
LikeLike
Dear Glinavos, that is exactly what I try to say by money magician Mario Draghi. Money is in modern times is absolute a illusion. The problems in the drachma would be exactly the same they have now, it is simpely no solution. Things get even worse. They have to reform, anyway, with a euro or with a drachme.
Greece will have a internal devaluation, also within the euro. Maybe a slower devaluation, but it will happen. I think at last the result will be same as with a Grexit. Income and prices will drop.
LikeLike
Ok, cutting personal reminiscences although, I doubt any of us humans is not led one way or the other by his own personal assumptions and experiences over the times and now they lead his choices and perceptions.
Anyway four main categories, if we leave out one mystery as far as I am concerned in the “About” or personal genesis section for a while.
“Europe in Crisis” – “Global Crisis” – Digital Economical Money* – Greek implosion.
If I recall correctly the Grand Narrative on the Grand Hoover is filed as first entry as the top article under: global crisis:
GLOBAL CRISIS POSTS
7 DEC 2010 – If greed did not cause it, what did? On Monday 6th December, I gave the keynote speech at a conference near Brisbane, Queensland (Australia) on the theme of Risk Management after the crisis.
Yes, here should be the tale of the Grand Hoover and the related tale about Germany:
If greed did not cause it, what did?
LikeLike
@LeaNder
Fiat money is a widespread and well-known term in economics.
It simply means “currency which derives its value from government regulation or law.”
In other words, it’s just “paper” that has some value because the law says so and, hence, citizens accept it as payment.
It differs from “commodity money” such as silver coins that derive their value from their weight in silver or “representative money” such as “gold dollar” banknotes that could be exchanged for a fixed amount of physical gold before Nixon cancelled the direct convertibility of the US dollar in 1971.
Don’t worry about Varoufakis and his Minotaur and Hoover stories. He is just setting up these stories for the purpose of playing Robin Hood with the Germans without them knowing (or so he hopes).
LikeLike
“In other words, it’s just “paper” that has some value because the law says so and, hence, citizens accept it as payment”
OK, thanks, Erik, I may be slightly hesitant of the usage in some comment sections and the longer narrative tradition spun around the FED. Since that’s were I first picked it up.
In a neutral definition, I don’t have any problems with it:
John Maynard Keynes (1965) [1930]. “1. The Classification of Money”. A Treatise on Money 1. Macmillan & Co Ltd. p. 7. “Fiat Money is Representative (or token) Money (i.e something the intrinsic value of the material substance of which is divorced from its monetary face value) – now generally made of paper except in the case of small denominations — which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.”
LikeLike
@LeaNder
“which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.”
This is certainly true for notes and coins, but not for the remaining 95% of our money which is issued by commercial banks in the form of interest bearing credit.
A nice business model for banks but one could ask the question, wouldn’t it be the tasks of governments to create money and then make it interest free available to society.
In order to flourish an economy needs money, like a plants needs water. To me it’s seems that the creation of money should be the privilege of the people (represented through their elected government) and not the privilege of private bankers.
There part in the scheme of things should be efficient distribution of the money that is made available to them.
Anyway also read this about full reserve banking. https://pdf.yt/d/J3al4g-8KAPvzA24
LikeLike
@LeaNder,
Colorful language, but I am not that impressed. Neither is the rest of the world I would think The USA is running a trade deficit with the rest of the world since 1976. Every other country would sooner or later get into trouble. Not in the US of A, because their currency is the official reserve currency of the world and they can print as much of it as they like.
This means that every other country in the world needs to keeps stacks of dollars if it wants to buy commodities like oil. There is a theory that the real reason for the Iraq war was the fact that Sadam had announced that he’d take Euro’s instead of Dollars for payment.
So the USA isn’t so much sucking capital from the rest of the world. They produce that themselves by operating the printing press. They are sucking in raw materials and finished product from the rest of the world.
Personally I can’t think of anything (produced) in the US of A that I would want to buy. Iphone’s, and running shoe’s are of course produced in Asia.
So the US of A has an enormous advantage in the sense that nobody really questions how much dollars there are printed, because there is at present no alternative.
Another point Yanis doesn’t address is the phenomenal growth of money. Different subject but closely related. Our present money is for 95% backed by nothing else than debt.
That is the promise from someone that over some time he will pay the amount involved.
If money equals debt (created by credit) is follows that if debt were to be re-payed there wouldn’t be any money left. Have you ever wondered how we seem to have become richer, but at the same time are more in debt than any time before?
LikeLike
Have you seen my lecture on the financial crisis? It deals with the US trade dynamics. See here https://iglinavos.wordpress.com/2015/02/09/explaining-the-financial-crisis-lecture-and-infographic/
LikeLike
Thank you for this iGlinavos. In fact Greece is double hit, and by the crisis and by the fact they can’t pay their depts. There will be no easy, painless solutions for Greece.
I understand exactly what Yanis wanted with his moderest proposal, the only problem of that plan was recycle money, who wants to invest in Greece? In what? In the greek railway? Nice for a museum railway, buy a few steam locomotives, but to make it a cost-effective business such huge investments are needed and nobody wants to do that. There is and was no political support to invest the surplus of the rich country’s in a bankrupt country. And that was the weak point in that plan. From the first moment.
LikeLike
Pim, you should of be course impressed. It’s a keynote speech after all. What context though? He doesn’t tell. 😉
LikeLike
Yanis and Lapavitsas are a bit like a Jehovah’s Witnesses, they is predicting the end of the world, but never not say when that will happened.
In my opinion the problem will be solved bij money magician Mario Draghi with a lot of inflation and deflation in Greece and Greece will stay the euro.
LikeLike
“predicting the end of the world, but never not say when that will happened.”
Lapavitsas’ may be even more extreme then YV., judged from his recent article.
YV did never state directly he wanted to leave the Euro, he claims, that is what Schäuble wants.
Lapavitsas demanded it in a book with Heiner Flassbeck.,whose foreword was written by Oscar Lafontaine. Against the Troika: Crisis and Austerity in the Eurozone Published February 2015.
*******
This is the imagery the surfaces in YV’s writings:
not really the end of the world but a repetition of the Great Depression. And good versus bad ways to deal with it.
I am slightly familiar with the US New Deal from my field, the arts. And yes, admittedly, I always assumed that the US dealt with the Depression a lot better then e.g. the Germans did. Thus I am very, very open to the suggested New Deal for the European South, theoretically.
What I wonder though, and you usually don’t find it in the allusions you stumble across in the debate, apart from frequently used analogies: To what extend did WWII have an influence on US ground, and helped the to move the US out of the Depression for good?
Two things we keep hearing: New Deal, Marshall Plan. What’s the GDP of the “North” that should create a “New Deal” for the South. Considered collectively? Would it be possible, and not create necessary budget cuts elsewhere? … Or other related disturbances, like the rise of the right?
US GDP 1910–60, with the years of the Great Depression
One of my most favorite quotes by Condi Rice, something she said in an interview around the run up to or maybe even after it was “mission accomplished in Iraq” went like this:
After 1989 everyone was wondering, who would be our new enemies now, then 911 happened and everyone knew.
The US may well need wars constantly due to the military industry and the connected employees all over the States. Look at the results in and around the “to be pacified Middle East”.
******
The German reunification created lots of fears abroad, and historically one could argue that Germany agreed in this process to join a monetary union, partly to alleviate these fears. But I am not really an expert on that topic either. … But I can see their are complaints, that Germany brought troubles to other countries based on it’s own currency/interest rate policies.
Thus what is the special interest if a pop-economist argues: Germany only created the monetary union to serve its own interests. Is this a simple shortcut so you don’t have to go into historical details only?
******
Greece needs help that is true. The problem may well be how to overcome its crisis, and yes one should look into post 2008 problems elsewhere in the context, without any one-size-fits-all approach. But one should deal with matters that make sure not others are pushed over the ridge.
And yes, at one point when the university library seemed to be overtaken by students of economics to a rather high degree, I once listened to an exchange between some of the future economists. Two apparently had a hard time to understand “sustainability”, trying to figure out how to could be related it to growth, demand and other terms I forget. … I may recall that special exchange since it seemed, on the surface to confirm my prejudices against this group. But I am willing to learn. 😉
LikeLiked by 1 person
“But I can see their are complaints, that Germany brought troubles to other countries based on it’s own currency/interest rate policies.”
But that seems to me the conclusion of an economist. I have been reading a lot of them these days. Conclusion, There doesn’t seem to be a thesis that isn’t disagreed upon by another economist.
Economics is extremely useful as a form of employment for economists.” – J.K.Galbraith, once said.
But what are the views of the general public? I think they are rather comfortable with the German attitude towards money. To the extend that we (the dutch) rather have a German overlooking these affairs than our own politicians, which we expect to collapse under pressure.
But there is another aspect that is seldom mentioned. There is always mention of labor productivity as if German products are cheap and that’s the reason why the rest of the world wants it.
But the truth of the matter is, that German products seldom are cheap, but mostly are of excellent quality.
People don’t buy Mercedes, BMW or Volkswagen because they are cheap cars, but because they believe they are excellent engineered cars.
So what are the Germans expected to do, to dampen their export success? Lowering their engineering standards, so others can compete?
Therefore, economists may explain German success from clever manipulation of currencies, the general public believes is has to do with the quality of the product they produce.
LikeLiked by 1 person
“But what are the views of the general public?”
that’s what struck me most in Lapavitsas vision, in a nutshell the troubles about “freedom” may be the hardest to deal with. I cannot see there is any place in it in his article: Open link
Notice, since I am also a certified Public Relations adviser the hint by Iannos may make sense: Change europe or evict greece? But anyway here is an open link: <
LikeLike
“Change europe or evict greece?”
Sure, reminds me of a text I read during the sixties.
“The Dutch metalworkers Union” warns the Peoples Republic of China for the very last time”.
But seriously. Why do we have to evict Greece? How do we know that the majority of the Greek wants to be evicted.
Is he now telling us that we should have an election in which we have the choice between changing Europe into Greater Greece or otherwise we have to evict the Greece.
I understand he’s an academic. Makes you wonder about the education system over there.
LikeLike
Sorry Pim, I seem to have recently pretty peculiar IT problems again. Pretty new ones for that matter.
Open link: Costas Lapavitsas: The case for Grexit Maybe that should be Iannos link, but then it would miss the headline: Change europe or evict greece?
Did you notice, by the way, that our friend, PeterSmith999, is a thorough Grexit convert by now.
And has an interesting new item on matters.
Admittedly I am slightly choleric, and once I was forced to look on European matters via the no-colonial lens, I did not read on. Admittedly.
LikeLike
@Leander,
Sorry to disappoint you but I twittered the same link already on august 6th before Peter Smith and Iannos discovered it.
https://contradictingyanis.wordpress.com/2015/08/06/beating-the-buggers-at-football/
Apart from the fact that Costas oversimplified the consequences of leaving (he seems to think that if you leave your debt magically will disappear) I didn’t comment it.
Later I found out that in order to get your banks working again you are a year further down the road, so you better think twice before you choose for that option.
What I of course do not like is that evict talk. I have no problem with Greece leaving as that is the choice of the majority of Greek. But they should also be brave enough to face the consequences of that decision and should not try to blame it on us.
LikeLike
Take care, Pim. This helps me a lot. Nothing to add anyway. No doubt you are the hero, who saw it first.
Loved it by the way. 😉 but that’s a different matter.
LikeLike