@wbmosler: MY COMMENTS ON CAPS REGARDING THE NEW GREEK FINANCE MINISTER'S COMMEN
@wbmosler: MY COMMENTS ON CAPS REGARDING THE NEW GREEK FINANCE MINISTER'S COMMENTS:
Mark Weisbrot has been arguing, for some time now, that Greece must try to emulate Argentina; that is, to default on its debts not as a bargaining strategy that yields a New Deal within the Eurozone but, rather, in the context of exiting the Eurozone altogether and going it alone. Recently, Paul Krugman has endorsed this position (see here and here). I think they are profoundly wrong.
There are two arguments against the recommendation that Greece and Argentina are similar enough to warrant an Argentinian road for Greece. There are those, like the Cato Institute and IMF diehards, who never forgave Argentina for having successfully escaped the clutches of the poisonous austerity (and internal devaluation) that the IMF had imposed upon the country so as to sacrifice a whole people’s prosperity in the interest of creditors, rentiers and assorted speculators who had flooded the country with dollars (during the era of the currency board). Believe me when I say that I am not one of them. Indeed, I salute the Argentinian people for having toppled a regime, and more than one government, that tried so desperately to sacrifice a proud people on the altar of IMF-led austerity. No, my criticism of the idea that Greece can ‘do’ an Argentina today stems from the view that the circumstances Greece is facing today are genuinely different to those of Argentina a decade ago.
The differences between the two cases, which render the analogy redundant, are three:
1st difference: The potential of exports to act as shock absorbers
SHOCK ABSORBERS FOR WHAT? THE IDEA IS TO SUSTAIN AGGREGATE DEMAND AT FULL EMPLOYMENT LEVELS WITH FISCAL POLICY.
Weisbrot and Krugman point out, correctly, that at the height of Argentina’s crisis, its exports (as a percentage of GDP) were not very different to those of Greece. Based on this argument, they dismiss the idea that Argentina managed to recover after its default-devaluation by means of export-led growth.
While it is quite true that Argentina’s export performance in 2001 was by no means better than Greece’s today, it is crucial to note that Argentina’s export potential in 2001 was vastly superior to that of Greece’s in 2012. By export potential I mean the degree of underutilisation of productive resources whose employment can, potentially, produce goods and services for which there is effective demand. In 2001, Argentina’s farms were woefully underproducing primary commodities that were, at that time, seeing their demand skyrocket. In sharp contrast, idle productive resources in Greece cannot produce much for which there is increasing demand.
Take for instance shipping and tourism, mentioned by Paul Krugman as two potential sources of Greek export growth: Both are in speedy decline! Additionally, whereas in the case of Argentina, its next door neighbour (Brazil) was entering a period of rapid growth, Greece’s neighbours are showing no such signs of vitality. Indeed, our traditional trading partners are also buffeted by recession (pushing down the demand for Greek tourism) while non-EU countries (such as Russia) cannot, and will not, make up the difference to any appreciable degree.
THAT DOES NOT MEAN GDP WILL FALL AS IT CAN ALWAYS BE SUSTAINED BY DOMESTIC DEMAND VIA APPROPRIATE FISCAL POLICY.
Lastly, on this note, Weisbrot and his co-author Juan Antonio Montesino argue that Argentina’s growth was not ‘export’ driven, noting that only 12% of its GDP growth during the 2002-8 period can be accounted for by exports. With all due respect, I fear that such a pronouncement cannot be made lightly. For it is impossible to separate neatly the effects on GDP of exports from the effect of internal aggregate demand when we take into account the fact that internal demand relies entirely on ‘animal spirits’ (i.e. on the optimistic expectations) of investors into goods intended for local consumption.
NOT TRUE, FISCAL ADJUSTMENTS CAN ALWAYS SUSTAIN DOMESTIC DEMAND AT FULL EMPLOYMENT LEVELS.
Put simply, the emergence of strong Chinese demand for Argentinian soy, beef etc., in conjunction with the growth of neighbouring Brazil, has had a major impact on the readiness of Argentinian investors to invest in activities that also generated internal demand. In short, that 12% quoted by Weisbrot is simply a gross underestimate.
SUSTAINING INTERNAL DOMESTIC DEMAND DOES NOT REQUIRE SAID 'INVESTORS'.
EVEN IF THE REST OF WORLD ENTIRELY VANISHED GREECE COULD STILL READILY SUSTAIN AGGREGATE DEMAND AT FULL EMPLOYMENT LEVELS VIA APPROPRIATE FISCAL POLICY.
2nd difference: Greece has no peg with the euro. It has the euro!
YES, THAT IS A DIFFERENCE, BUT NOT AT ALL AN OBSTACLE.
Analysts like Krugman, Weisbrot and Rubini make the utterly good point that Greece would benefit enormously from a devaluation of its currency.
HOW CAN A LARGE CUT IN REAL WAGES FROM CURRENCY DEPRECIATION BE CONSIDERED A BENEFIT BY PROGRESSIVES? INSTEAD IT BENEFITS EXPORTERS AS IT REDUCES THE REAL STANDARD OF LIVING OF THOSE WORKING FOR A LIVING.
Of course it would. Argentina does, indeed, provide a brilliant example of how a massive devaluation can help a country escape a debt-deflationary cycle.
IT'S FAR MORE PROGRESSIVE TO USE A FISCAL ADJUSTMENT.
As, for that matter, does Iceland. However, what they are neglecting is that it is one thing to break a peg linking your currency to some other hard currency (as in the case of Argentina), or to devalue your floating currency (as did Iceland), and quite another to have no currency but to have to create one from scratch.
In the case of Argentina the peso was in existence. All it took to devalue it was to announce that the 1:1 peg with the dollar was over. Suddenly ALL incomes and ALL savings were devalued by the same percentage. Overnight. End of story. It was not pleasant but it could be done.
TRUE, AND REAL INCOMES WITH REGARD TO IMPORTS FELL 70%, TO THE BENEFIT OF EXPORTERS.
In the case of Greece it simply cannot. And this makes a world of a difference. Why? Because of two important reasons. First, because of the crushing delay in introducing a new currency.
Secondly, because of what I call the bifurcation between the stock of savings and the flow of incomes. But let me take these one at a time.
Delay: Bank of Greece colleagues tell me that it will take months before ATMs are stocked with new drachmas once they get the go ahead to print them. Even if it takes weeks, an economy cannot remain un-monetised for so long, especially when already on the canvass of a deep crisis, without major civil unrest and an almost terminal effect on economic activity.
FIRST, DRACHMA BANK DEPOSITS, CREDIT AND DEBIT CARDS, AND CHECKS CAN BE AVAILABLE ALMOST IMMEDIATELY.
SECOND, EURO CAN BE USED FOR CASH EXCHANGES UNTIL NOTES AND COINS ARE CREATED, AS FACILITATED BY GOVT. POLICY AS FOLLOWS:
IF THE GOVT OF GREECE BEGINS TAXING AND SPENDING IN DRACHMA USING THE SAME NOTIONAL QUANTITIES AS IT DID WITH EURO, AND THE GOVT. DOES NOT FORCE CONVERSION OF EURO BANK DEPOSITS THERE IS SUDDENLY A LARGE SHORTAGE OF DRACHMA. THIS WILL BE EVIDENCED BY AGENTS TRYING TO SELL EURO AND BUY DRACHMA, AND THE GOVT. CAN ACCOMMODATE BY SELLING DRACHMA FOR EURO ON A ONE FOR ONE BASIS. THIS KEEPS THE DRACHMA STABLE AT THAT RATIO AND FACILITATES THE USE OF CASH EURO UNTIL DRACHMA NOTES AND COINS ARE AVAILABLE. AT THE SAME TIME THE GOVT. IS ACCUMULATING EURO WHICH ALLOWS IT TO SERVICE IT'S RESIDUAL EURO OBLIGATIONS AS DESIRED.
Bifurcation: Even ignoring the crippling effects of the delay, we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes). This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and theflow of incomes and pensions (once the banks re-open) will be in drachmas.
NOT TO FORGET THAT ONGOING TAX LIABILITIES WILL BE PAYABLE IN DRACHMA, AND GREECE IS CURRENTLY RUNNING A PRIMARY SURPLUS, WHICH MEANS THERE WILL BE A SEVERE DRACHMA SHORTAGE IN THE ECONOMY AND A STRONG DESIRE TO SELL EURO TO BUY DRACHMA.
So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter.
EXCEPT THE COUNTER EFFECT OF DRACHMA DENOMINATED TAX LIABILITIES WILL RESULT IN THE OPPOSITE EFFECT- CURRENCY APPRECIATION IF LEFT UNCHECKED.
Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).
NO, THE WIDESPREAD DEMAND FOR DRACHMA WILL RESULT IN DIMITRI AND KIKI SELLING EURO TO GET THEIR NEEDED DRACHMA.
In short, even if we neglect the devastation caused by the delay in the introduction of the new currency (something Argentina did not have to worry about), the new currency will be debased ever so quickly due to this bifurcation, leading to hyperinflation and the loss of most of the competitive gains we might have hoped for from the devaluation.
I DO NOT AGREE!!!
3rd difference: Greece is perfectly capable of poisoning the water it is swimming in (Europe)
When Argentina defaulted and broke the peg, the ill effects on its trading partners (China, Brazil etc.), as well as on the broader macro-economy in which it was functioning, were negligible. If Greece leaves the euro, however, the results will most certainly prove catastrophic for our ‘economic ecology’, and in a never-ending circle of negative feedback, will bite our struggling nation back.
NOT IF IT UNDERSTANDS HOW TO SUSTAIN DOMESTIC DEMAND VIA FISCAL POLICY, AND OF COURSE USE A TRANSITION JOB GUARANTEE FOR SUPERIOR PRICE STABILITY.
To begin with, Greece must exit not only the Eurozone but also the European Union. This is non-negotiable and unavoidable. For if the Greek state is effectively to confiscate the few euros a citizen has in her bank account and turn them into drachmas of diminishing value, she will be able to take the Greek government to the European Courts and win outright.
AS PREVIOUSLY DISCUSSED, IT'S CRITICAL NOT TO FORCE CONVERSION OF EURO BANK DEPOSITS TO ENSURE A STRONG DRACHMA AT INCEPTION.
Additionally, the Greek state will have to introduce border and capital controls to prevent the export of its citizens euro-savings.
WHY SHOULD THE GOVT. CARE WHETHER CITIZENS KEEP EURO IN GREEK BANKS OR IN BANKS OUT OF GREECE?
Thus, Greece will have to get out of the European Union.
MAYBE, BUT NOT FOR THOSE REASONS.
Setting aside the domestic ramifications over loss of agricultural subsidies, structural funds and possibly trade (following the possible introduction of trade barriers between Greece and the EU), the effects on the rest of the Eurozone will also be cataclysmic. Spain, already in a black hole, will see its GDP shrink by more than Greece’s current deflationary record rate, interest rate spreads will tend to 20% in Ireland and in Italy
NOT IF THE ECB SUSTAINS IT'S 'DO WHAT IT TAKES TO PREVENT DEFAULT' POLICY.
and, before long, Germany will decide to call it a day, bailing itself out (in unison with other surplus countries). This chain of events will cause a bitter recession in the surplus countries clustered around Germany, whose currency will appreciate through the roof, while the rest of Europe will sink into the mire of stagflation.
I DON'T SEE THAT AS THE LOGICAL PROGRESSION.
How good will this environment be for Greece? I submit it to you, dear reader, that the answer is: Not good at all!
NOR IS IT A LOGICAL OUTCOME.
In short, whereas Argentina’s and Iceland’s successful default-devaluation strategy did not have adverse effects on the overarching environment in which they had to exist after their bold move, a Greek euro-exit will be the equivalent to poisoning the pool in which we must swim.
I DON'T SEE IT THAT WAY IF DONE AS PER MY PROPOSALS.
Does this mean that Greece ought to grin and bear the massive and misanthropic idiocy of the bailout-austerity package imposed upon it by the troika (EU-ECB-IMF)? Of course not. We should certainly default. But within the Eurozone. (See here for this argument.) And use our readiness to default as a bargaining strategy by which to bring about a New Deal for Europe (in a manner that I have written about here).
THIS STRATEGY DOES NOT FOLLOW FROM THE PRIOR ANALYSIS.
EU AUSTERITY HAS BEEN AN EPIC CRIME AGAINST HUMANITY, AND, UNFORTUNATELY GREECE MAY NOT HAVE THE UNDERSTANDINGS NEEDED TO REVERSE IT.