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.
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.