The Path to a National Currency: Questions for LAE‏

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The Greek media is not paying much attention to Mr Lafazanis and his Laiki Enotita (LAE meaning Popular Unity). I think this is a major mistake. The disaffected voters of Syriza (especially the young) are likely to be more significant in number to the 6-7% currently projected. A significant proportion of votes for LAE is likely to derail efforts to set up a coalition government regardless of who is in the lead on September 21st. If Golden Dawn achieves say 6%, KKE 7% and LAE 12%, then a quarter of the electorate will have explicitly chosen Grexit.

It is important therefore to de-construct Mr Lafazanis Grexit rhetoric AND to publicise the fallacy of his plans. This actually should have been much harder to do, if only Prof Lapavitsas was honest to the people, and did justice to his own academic work and told us the truth about LAE’s Grexit plans. There are numerous flaws with a logic of Grexit that I have addressed before in serious, and humorous (I hope) ways. This time however lets focus on the bare basics, the issues of payments and investments.

Problem One: Payments

Mr Lafazanis yesterday on SKAI radio tried to argue that he is not the representative of the party of the Drachma, yet he is the advocate of an exit from the Eurozone. Ignoring for a second the paradox, Lafazanis failed to address a key aspect of Grexit and a core component of any attempt to return to growth via a national currency: the country’s ability to service its external (hard currency) obligations.

Mr Lafazanis claims that a comprehensive default on external debt will ease pressure on the government, which will then be able to recapitalise banks and inject liquidity into the economy via borrowing from the newly freed Bank of Greece (effectively printing money). He is perhaps right to claim that this will not initially create inflationary pressure, due to the highly deflationary trajectory of the economy immediate after Grexit, but lets leave this aside for the moment.

The main problem (and I am guessing here that Lafazanis does not really understand economics, micro or macro) is that cancelling sovereign debt, does not mean that the government and private parties will not have ongoing payment obligations denominated in foreign currencies. Even if all sovereign bonds are scrapped, how will the government buy goods and services from abroad? It is ok to say that the Bank of Greece can print money and inject liquidity, but this only works if one thinks of the economy as entirely closed.

As Chryssogonos explained some time ago (arguing against Grexit) the Greek state does not have the foreign exchange reserves it will need to prop-up a new currency. The value of the Drachma would not drop by a little (as Lapavitsas falsely claims). It would drop like a rock. There is no evidence that it could even be accepted as payment abroad. And what about private parties who have external obligations? I am not talking only about mortgages to foreign banks, I am taking about trade debt. How will manufacturers buy materials (denominated in dollars or euros) with Drachmas that counter-parties are unlikely to accept? This is not a theoretical danger, it is a real and immediate problem. At least yesterday Mr Lafazanis seemed not to understand the issue, or not to have a solution.

The only way a Drachma could get its legs would be via loans in hard currency, probably from the IMF. Therefore, Schaeuble’s plan for temp-Grexit (with generous support) is a better prospect than the LAE unilateral actions plan. Prof. Lapavitsas would be begging for loans within 24hrs of defaulting on all external obligations. Oh, and lets not forget that while this is happening, the value of all deposits has reduced massively in real terms (through re-denomination to Drachma, an enforced haircut of grand proportions).

Problem Two: Investments

Mr Lafazanis claims to have a comprehensive development plan. From what has been said so far, the plan sounds like old fashioned import substitution industrialisation. In a way, some native industry development will be the inevitable result of a return to the Drachma. As imports will soar in price and trade networks will be disrupted, native low skill manufacturing may replace some imports.

Why should this be limited to low skill, low value manufacturing? High-tech, high value complex manufacturing relies on significant capital investment that no private party will be willing to supply to Greek firms in the medium term. The government won’t be able to finance the proclaimed large investment projects for the reasons explained earlier. The conclusion is this: Yes, there is capacity in Greece for industrial development and for import substitution. However this will be done at the bottom end of the production level and will generate employment and wages worst than Bulgarian standards.

There is opportunity for growth in the Greek economy and large opportunity for improvements in productivity. Nonetheless, all of those are dependant on private sector rationalisation and development. None of it is possible in an environment of credit constraints. To return to the issue of inflation mentioned above, if the LAE development plan is based on state spending in the long run, monetary expansion will create inflation. A South-Korea style national industrialisation plan is not possible in 21st century Greece, no matter how much money the national bank creates.

Conclusion:

A return to the national currency could lead to growth eventually, but it will entail a severe drop in living standards, economic dislocation unlike anything experienced so far and most probably high levels of borrowing at disadvantageous rates. If, accepting these constraints, the Greeks want to choose the ‘freedom’ of the Drachma, that is their business. Mr Lafazanis and his advisors however need to come clean, least a quarter of the electorate again makes a selection on the basis of populist subterfuge.

I invite Mr Lafazanis and Prof. Lapavitsas to explain to me how I may be wrong. The Greeks would welcome the clarification.

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@iGlinavos

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23 thoughts on “The Path to a National Currency: Questions for LAE‏

  1. A joint gr/br exit in the making?

    I wonder why, to the best of my knowledge, nobody has ever thought of joining the UK pound (instead of the euro). Such a scheme would solve a lot of practical issues with little effort (immediate availability of banknotes and coins, international acceptance of the currency, fairly stable exchange rate etc).

    Note that many Greek intellectuals (including our host of this blog) have a UK academic backgound, and there are warm friendly contacts in the highest circles of finance (such as Lord Lamont).

    If it would solve any of Greece’s core problems, I know not.

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  2. I surely can see the rational for a majority of the Greek to want to stay in the Euro, but the real question is of course, “how about the others”.

    You are probably right in accusing mr Lafazanis not informing the Greek people about the consequences of a Grexit.

    But what is your own contingency plan if the 3 rd bail-out doesn’t work out as expected?

    There’s a fair chance this will happen and are we (the rest of the eurozone) than expected to continue dumping money in (what appears to be) a bottomless pit?

    How sure are you that this will happen? There are nowadays plenty of people about that already say that it is about time Greece suffers the consequences of it’s illicit entry of the Eurozone and that consequence should be a Grexit.

    I know we can’t force Greece out, but can we force Germany to stay in?

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  3. I think something radical is needed, not this election, but the following one.

    Whereas Grexit and devaluation would have been a good option a few years ago, now there really is not any point. the adjustment have happened in terms of wages, which in theory will make Greece more competitive again.

    Other policies will be needed. The problem will not go away. this election, whoever wins, will not solve anything.

    So somebody might as well plan for the next election after this one.

    Best thing if Syriza lose and then try next time again, to bring something more combative to the negotiation table. National Unity will then join up again.

    Here my ideas for the next time around.

    https://radicaleconomicthought.wordpress.com/2015/09/10/greece-summary-and-index/

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    • Interesting resume, Matt: “working in a bank, lending, credit control, bank customer information system, advising on how to set up a voucher privatisation fund, credit control work-flow system, data ware-house for bank trades, web-based independent financial advice system,

      and cooking, as a professional chef, for one of the Rothschilds, very briefly.”

      Voucher privatization like done in Russia?

      Why two parallel money systems: universal acceptance, last resort program?
      “4) Introduce supplementary currency to give basic small income (to ensure universal acceptance) and allow employer of last resort program,”

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      • mikenetherlands says:

        I understand your anger, Matt Usselman, the introduction euro was in this form was a political, stupid idea. You don’t have to be a professor and economist to understand this fact.

        Nobody wanted that euro, in Holland we were forced in by our politicians.
        But, like our former minister of finance Gerrit Zalm said, you can make out of eggs an omelette, but not out of an omelette eggs.

        The final systems of eurozone are so connected, it is almost impossible to split Greece out of this systems. And, do you want Greece to be like Montenegro and Kosovo? Both are very poor country’s,
        And how do you want Greece, mentioned before by iGlinavos and me, to pay the imported goods like medicines, spare parts, Petroleum, etc?

        iGlinavos invited Mr Lafazanis and Prof. Lapavitsas to answer this question, we are still waiting for the answer.

        Do you have the answer for us?

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      • Voucher privatisation was in the Czech Republic.

        And here, if you are interested, an overview of how I would see a supplementary currency working in Greece:

        https://radicaleconomicthought.wordpress.com/2015/07/09/the-miracle-currency-the-g-euro/

        And how that compares to other models of supplementary currencies for Greece, which were discussed – all outside the country – in greece nobody seems to be interested. A big mistake, I think.

        https://radicaleconomicthought.wordpress.com/2015/07/25/tax-credits-and-parallel-currencies/

        Now, none of the parties up for election discuss this, as far as I know. I do not know why not, if any Greek party proposed it they would have a unique advantage over another one. I suppose because it is new, and not well understood, everybody thinks it will not work.

        And some proposals for suppementary currencies are a bit unfeasible. You have to pick and choose, and design carefully, and then it will work.

        IGlinavos might know if anything like that will feature in any of the proposals from the Greek parties up for election at the moment. I very much doubt it.

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      • A parallel currency as a way of dealing with the liquidity crunch is not discussed because 1) Varoufakis discredited the idea by his innate handling and 2) it is considered unnecessary as liquidity is once again sorted via ELA now that Greece is ‘within programme’

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      • @IGlinavos
        “A parallel currency as a way of dealing with the liquidity crunch is not discussed because 1) Varoufakis discredited the idea by his innate handling and 2) it is considered unnecessary as liquidity is once again sorted via ELA now that Greece is ‘within programme’”

        Ok, fair enough, makes sense not to make it an issue in this election.

        You almost have to design it and demonstrate it as a prototype to show how a parallel currency would work, because it is very difficult to see in the abstract.

        So it could be used to bring in locally at a council level, where a local councils could decide to allow to have some of its tax revenue or local council charges paid in the parallel currency which it issues. (maybe only £10 Euro a month per person). It would only be accepted by merchants for payments for all goods and services which originate in the local council area. All the advantages apply, and people could get used to the idea on a very small scale. It could then be developed and eventually rolled out nationally, once a party puts it in its election programme.

        Local currencies exist, probably even in Greece, but they never (a) get issued by the local government and (b) they never get accepted by the local government in payment for taxes.

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      • To Matt, re. your G-euro link:

        I’m not perfectly at ease in monetarism, but it seems to me that the G-euro reasoning is a well-known fallacy of monetarist theory. There is a fundamental difference between (a) printing money (one way or another) and (b) creating real economic value (as goods and services).

        If I’m not mistaken, nowadays in the USA some additional $25 have to be created out of thin air to increase the US GDP by just $1. This multiplier (from money supply to GDP) is not 2, it’s just 1/25. Don’t take my word for it… it’s just something off the top of my hat.

        Anyway I doubt that G-€4.3bn of thin-air money (as you propose on your blog) would increase the Greek GDP by the same amount or more. Actually these G-euro’s might just be used for payments that otherwise would simply be done in euro. In other words, the net effect might be just a payment substitution of one currency (the regular euro) with another currency (the G-euro) of the same value (nominally).

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  4. @mikenetherlands

    I do not want to be Greece like Montenegro, I would like Greece to consider keeping the Euro as its currency, while having an independent central bank, like Montenegro does. That is quite a big difference.

    As long as Greece keeps its current account in balance, it will have enough currency to pay for goods from abroad. That is easier if you keep the Euro – in my view.

    Now Greece has its current account in balance, it has even a small surplus, I think, so there is no need to worry about imports.

    However, quite a lot of money is paid out in interest payments to (mainly troika) creditors abroad. If that is stopped through a temporary moratorium, pending re-negotiations about the debt, a lot of money would stay in the country, also helping to pay for imports.

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  5. mikenetherlands says:

    Dear Matt Usselmann, if one thing is clear after half a year, there will be no re-negotiations about the debt. Non!

    They will let get Greece go to hell. Sure! There will be no investments, no possibility to borrow money, and Greece will be worse than Montenegro and Kosovo.
    Greece is a small, poor country. Greece will be a peace of souvlaki for the lunch of the troika.

    From the first day the euro is a battle between France and Germany, and again, you don’t have to be a professor to understand this.

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  6. You reckon that Troika, not having received anything on its debt from Greece in six months, will not want to start re-negotiating?

    If Troika will not come to a mutually satisfactory agreement with Greece, Greece will continue to prolong its moratorium, and continue not paying.

    The only negotiating ace which Europe has is the structural growth fund and the agricultural payments which are about 3bn a year each, about £6bn each. Europe could withhold that. Greece will be prepared for that, and expect that that would happen.

    Against that, Greece will not have to pay interest and repayments on its troika debt.

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    • You are kidding us, aren’t you?

      Not paying interest would mean no possibility of refinancing the existing debt. Already Greece pays less interest on its debt than any other country in a similar position. Thanks to the troika. What more do you want?

      No interest at all? Well, in that case, why bother about the seize of the debt. At zero interest a debt ratio of 200 against GDP will cost you exactly as much as a ratio of 300 or 400. Zero.

      All these so called technical solutions boil down to the same thing. Let others pay for your pleasures.

      The only thing that will help Greece is to put their act together. The country is bankrupt, so you have to start from scratch. Indeed, as if you were Montenegro.

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      • “All these so called technical solutions boil down to the same thing. Let others pay for your pleasures.”

        You could define a cut in the amount of oustanding debt like that, but this is of course what the IMF proposes. Why don’t you argue with them?

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    • mikenetherlands says:

      Greece is for the troika and the IMF a piece of souvlakia mé kremedakia, tsjajdiki, alataki, ke dio pecettes and noting else. Nobody expect the money back, the euro is a political matter. Nice fantasy and dreams, just like the dream of our friend Varoufakis about a European left-wing mouvement.

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  7. @ Matt Usselman,

    “You could define a cut in the amount of outstanding debt like that, but this is of course what the IMF proposes. Why don’t you argue with them?”

    Indeed you could and that has been precisely the reason it has been refused over and over again. However, I take it that you subscribe to the IMF and the Yanis vision that the debt amount has to be cut.

    So I’m fine arguing with you on this matter.

    Let me put it this way. As soon as living standards in Greece start dropping below the living standards of other eurozone members (Latvia) we (as the eurozone) should consider a debt relief, but not a single second earlier.

    By the way, the Greek outstanding debt (to private banks) have been cut to 50% and that didn’t seem to bring about a change in attitude anyway.

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  8. @erikdesonville
    “If I’m not mistaken, nowadays in the USA some additional $25 have to be created out of thin air to increase the US GDP by just $1. This multiplier (from money supply to GDP) is not 2, it’s just 1/25. Don’t take my word for it… it’s just something off the top of my hat.”

    You are talking about the quantitative easing money in the US, this is, as far as I am concerned, more to do with rescuing the financial sector, which was stuck with illiquid assets in a falling market. Plus saving interest on expensive government debt.

    QE in Europe is different, as this is a desperate attempt to avoid deflation.

    But People’s Quantitative Easing as proposed in the UK is different yet again, as the money is invested in infrastructure.

    Now People’s Quantitative Easing could also be done in the Eurozone, instead of what the ECB is doing, buying up government bonds.

    As a further alternative, the ECB could do “helicopter money”, so give the Euro 60bn a month it spends on QE to each of its 335m inhabitants, that works out at about 180 Euro a month.

    “Anyway I doubt that G-€4.3bn of thin-air money (as you propose on your blog) would increase the Greek GDP by the same amount or more. Actually these G-euro’s might just be used for payments that otherwise would simply be done in euro. In other words, the net effect might be just a payment substitution of one currency (the regular euro) with another currency (the G-euro) of the same value (nominally).”

    That is a good point. It depends who you give the money to. If you give it to a rich person, who is already saving, he would substitute Euro expenditure by spending the G-Euro, and save even more Euro.

    If you give it to a poor person, who is desperate for some money, it will be spent. I guess in Greece there are more poor than rich people, and on average it will have a net beneficial effect.

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  9. @Matt

    If I follow the reasoning… it would be much more efficient if the Fed, instead of its high-tech massive QE, would just give a very small fraction of that money directly to the poor, say X dollars. Then they could spend it, via the multiplier the GDP goes up (by 2*X or so), taxes go up (by X), the thin-air money X=X equals out, everybody happy.

    It sounds so deceivingly simple (there isn’t even a need for G-dollars), I wonder what I may be missing.

    (Litho by the Dutch graphic artist M.C. Escher)

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  10. mikenetherlands says:

    Listen Math, I wrote this before, Europe isn’t a continent of strong visions, and absolute not of radical visions.
    We all agree that the eurozone is far from perfect. But the eurozone exists only 14(?) years. Yes, you can start a revolution in Greece, aldo the Greek population is rather conservative. But not in north Europe.

    Yanis Varoufakis is starting some european movement for a more (leftist) democratic Europe. Fine. What does he/they think? The population of the rich countries will give to the Greece what they want because it is a democratic European decision? North Europe is neo-liberal. Not leftish, here they don’t like that revolutionair stuff. Varoufakis is absolute not populair here.

    Escher, great artist. Great drawing. We have also a good saying in Holland. “Wie betaalt bepaald”. He who pays the piper calls the tune. Whether you like it or not. And that is the realty at the moment.

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  11. @erik
    “It sounds so deceivingly simple (there isn’t even a need for G-dollars), I wonder what I may be missing.”

    Nothing.

    It was a political choice not to do that, as it would give money to the poor and unemployed.

    But we got QE instead , which gave money to the financial sector, which allows the financial sector to make enormous profits from money funded by the taxpayer. Governments allow the Central Banks to create that money, and which entirely goes into the pockets of the rich.

    This is an ongoing subsidy by the state for the banks. Because once banks are awash with money, then state starts paying money on deposits. (as happens in UK and US – that becomes “monetary policy”) It is a complete scandal currently under-reported.

    @Mike
    “Europe isn’t a continent of strong visions, and absolute not of radical visions.”

    Well perhaps, but it has different radical visions and policies say, about refugees, nuclear power, etc. Different from country to country.

    Also, it is only radical at the moment, once accepted it will be mainstream, like anything.

    Liked by 1 person

  12. mikenetherlands says:

    True. Different from country to country. And that is the drama of Europe. Everybody is going in a different direction.
    Geert Wilders with his right-wing populism anti-immigration Party for Freedom Is in the polls the biggest political party of Holland. In Greece is the extreme left party SYRIZA the first or second party. How can you expect a strong european vision?
    And that is the reason why I said Europe isn’t a continent of strong visions. There is no mainstream, there are many, many streams.

    Money for nothing and your chicks for free? (Brothers in Arms, Dire Straits, thank you Erik.)
    Give money to the poor and unemployed? Sympathetic idea. But, like I said, North Europe is neo-liberal, that is the piper’s tune. And I don’t think that will change.

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