Voting yes to an ‘alexit’
To save their future, Greeks need to lose what’s hurting them most: Alexis Tsipras.
The idea that Greece might and even should get out of the eurozone, by force or by voluntary withdrawal, has been around for many years. Two Citigroup economists are credited with creating the word “Grexit” in 2012. Deep in both debt and recession since 2008, Greece is in a fiscal crisis that seems to point inevitably to the abandonment of the euro and a return to a bright new life for the Greek drachma as the national currency.
But as Greece gears up for its divisive referendum on Sunday, amid threats and warnings of exit from the Eurocurrency zone, a new word may be in order: Alexit.
If the referendum is held as planned, a “Yes” vote will not end the immediate crisis. Given Greece’s debt and economic structure, the country will still face adjustments spread over decades, even while remaining within the eurozone.
But if the majority of voting Greeks say “No” to the incomprehensible referendum question (which essentially means agreeing to the creditors’ austerity proposals), it is far from clear that an exit from the eurozone is the right future for this small country of 11 million people who account for less than one per cent of the European economy.
Greek Prime Minister Alexis Tsipras, a master of manipulative dual thinking, says Sunday’s vote is not a referendum on European membership. Even though he portrays Europe and its international agency collaborators as blackmailing thugs who are out to crush his country, he simultaneously insists Greece wants to remain a proud member of the thuggery.
But if any exits are warranted, it is the exit of Alexis Tsipras from power.
It would be easier on Greece, Europe and the rest of the world if Tsipras left office rather than Greece leaving the eurozone.
It has never been satisfactorily explained by anyone as to how exactly Greece would legally, financially and economically slide out of the eurozone.
Even less clear is the proposition that a Greek exit is desirable — for Greece and/or Europe. While supported by a wide range of political and economic thinkers on the left and right, the economic benefits of a Greek withdrawal may be more the product of storytelling than of hard reasoning. Grexit is a great catchword, but it is not irrefutable economics.
From the beginning, freemarket economists were sharply divided over allowing Greece into the eurozone in 2002. Nobel economist Milton Friedman stood opposed. In a 1997 commentary that has been frequently recycled in recent days by those both on the left and right, Friedman said Europe “is composed of separate nations, whose residents speak different languages, have different customs, and have far greater loyalty and attachment to their own country than to the common market or to the idea of ‘Europe.’ Despite being a free trade area, goods move less freely than in the United States, and so does capital.”
Europe, said Friedman, was not unified enough culturally, economically or fiscally to justify a single monetary arrangement.
In Friedman’s view, if Greece had its own currency it could devalue the currency in the face of a crisis. Instead, as part of the euro, Greece now has no choice but to make real and difficult changes to its economic and fiscal structures.
On the other side was Robert Mundell, another marketoriented Nobel economist, who backed the euro and Greece’s 2002 adoption of it. He told me in a 2012 interview that, indeed, Greece cannot resort to devaluation since it does not have its own currency.
“But Greece’s problem is not an overvalued currency,” said Mundell. “The problem is an excess of debt and budget deficits. Greek debts are now denominated in euros. If Greece created a new currency in order to devalue, its debts would still be in euros and devaluation would not change that fact. Of course, Greece could repudiate its debts in euros but if it were going to take that draconian step, it could do it without creating a new currency. Should Greece follow the path of Argentina? That would result in a horrendous drop in the standard of living and social benefits, and if that were politically possible, why not do it inside the euro?”
Whether they know it or not, Greeks on Sunday will be voting for one of two economic theories — for Friedman or Mundell.
Under the Friedman model, the economic adjustment is made via devaluation: For every euro in their bank accounts or paycheques, Greeks would receive a few hundred or maybe a thousand new drachmas, each drachma worth a small fraction of euros. The rot in Greece’s structures would remain.
Under Mundell, the euro stays, but wages, benefits, pensions, work rules and debt payments change, setting a viable foundation for future growth.
The highest-profile current advocates for Grexit are, ironically, on the left. University of Columbia Nobel laureate Joseph Stiglitz favours a “No” vote that he said could give Greece an opportunity to “grasp destiny in its own hands.” He concedes, however, that if Greeks had to shape their own future their country might “not be as prosperous as the past.” That’s easy to say as an armchair Greek from the comfort of New York City. Maybe Tsipras could adopt “Less Prosperity” as a slogan.
In fact, Greece has prospered nicely since it joined the euro in 2002. GDP per capita rose from US$12,000 in 2000 to a peak of $31,000 in 2008. Post-crisis, GDP remained at $22,000 in 2014, still double that of nearby Turkey.
The peak was unmistakably built on absurd debt levels and massive volumes of seemingly cheap euros that flowed in from outside the country. That European governments, banks and other players bear responsibility for lending Greece ¤300 billion to create an artificial boom means that they must face non-payment of much of the debt.
And Greece had begun to show signs of recovery through 2013 and 2014 as it adopted or accepted assorted austerity and economic reform measures. A February EU report highlighted Greece’s return to modest one per cent growth in 2014 and forecast gains rising to 3.6 per cent in 2016. Contrary to Stiglitz’s view, austerity and reforms were kicking in through 2014. Investment increased for the first time since 2008.
But the EU warned that its forecast was prepared “on the basis of the full implementation” of the latest reform packages — before the election of Alexis Tsipras and before his radical-left Syriza party launched a destructive attack on Europe for allegedly at- tempting to asphyxiate Greece by killing it with reforms.
Stiglitz and another famed Nobelist, Paul Krugman, argue that Europe is somehow deliberately trying to knock Greece down, to force Greece to “knuckle under, to accept the unacceptable.” Never sensibly explained is why the EU, the European Central Bank and the IMF would want to crush Greece, especially if it meant creating havoc across Europe.
Greece was, in other words, on the road toward recovery and returning to growth at the end of 2014. Stiglitz and Krugman claim that if Greece adopted EU reforms in taxation, labour rules, pension systems and continued with privatizations, the economy would sink even deeper into recession/depression. The evidence, while hardly bulletproof, suggests otherwise. Tsipras, not austerity, is dragging Greek economic performance down into another recession.
T he proposition t hat using inflation and competitive currency devaluations is a preferred option to a relatively stable euro is at the heart of Grexit theory. Free from the yoke of the euro, Greece could go it alone with its own drachma. And what would a drachma deliver? Many on the left consider inflation to be a viable solution to economic and fiscal mismanagement. With “monetary sovereignty,” Stiglitz says Greece’s monetary policy would no longer be “set by a central bank that focused single-mindedly on inflation” while ignoring “disadvantaged workers.”
In Krugman’s view, “devaluation couldn’t create that much more chaos than already exists.”
At this point, yes it absolutely could. Greece was just beginning to turn the corner at the beginning of 2015, and could still get its economy moving if the Tsipras-created turmoil could be ended. The danger of a Grexit, or an ongoing bout of uncertainty, would be far more damaging than the application of at least some version of the reform packages now under review.
Instead of austerity and reform in Greece and in Europe’s structure, inflation and devaluations would merely allow corrupt and incompetent governments to get away with bad policies. Europe and Greece need reform, not another currency.
In a statement Friday, 246 Greek academic economists told Stiglitz and his fellow armchair Grexiters to stuff it. “Greece must remain in the core of the EU, which is the Eurozone,” said the statement. “Our unequivocal answer to the real question of the referendum is: YES. Yes, to Europe.”
And, they should have added, Yes to an Alexit.