by Tyler Cowen
on May 16, 2012 at 9:38 am
in Current Affairs
“The euro will leave Greece before Greece leaves the euro.”
On Monday, bank deposit withdrawals from Greece were about 700 million euros.
Strange that the SEK has weakened against the Euro since Monday.
I don’t see why Greek can’t default on the loans, but stay in the Euro.
Absent debt, they could rapidly get the budget into line (1%?).
Because the Greeks need still more money to pay public sector wages and benefits. So if they can’t borrow Euros they have to print drachma. Simple as that. Remember in the UK, even with our austerity package, public sector debt is still increasing. Only here, if needed, we could at least print sterling.
Wouldn’t printing Euros work better for them than printing Drachma? They literally have the printing presses, and the legal authority to use them. Or at the more subtle level, they have the ability to reduce the reserve ratio of Greek banks, increasing the Euro-denominated M1 without printing any new Euro banknotes.
Granted, Eurozone treaty and regulation place strict limits on how far they can go down either of those routes, but the Greeks also have the ability to lie about their compliance with Eurozone regulations. And, at least until recently, the rest of Europe has had an almost incredible ability to believe transparent Greek lies in the financial and economic realms.
Not a long-term solution, obviously. But in the long term, trying to fix a primary deficit by printing banknotes will fail by hyperinflation regardless of the currency you chose. In the short term, it seems to me, that inevitability can be better hidden behind lies and within the vastly larger Euro financial realm than it could with an overt reintroduction of the Drachma. And, from the Greek point of view, the fact that “counterfeit” Euros (M0 or M1) would endanger the whole Eurozone economy is a feature, not a bug.
It’s clear that legal compliance issues don’t matter any more, since everyone in power just makes it up as they go along when in crisis (a permanent state of affairs, it appears). So I wonder the same thing as you. What army is going to stop the Greeks if they decide to print Euros?
Traditionally, it’s the Greek army that steps in.
If Greece prints drachma, will the oil companies sell Greece the oil the government needs to operate, will other global and LOCAL corporations sell the government the goods and services the government needs? After all, even local Greek corporations need to buy oil and other things and if all they have are drachma they got paid by the government, how will they pay in anything but drachma? And what of all the workers and pensioners paid in drachma – will the oil companies sell them oil in drachma, as well as all the other goods and services.
Greece is 3% of the EU economy, so the drachma denominated won’t be a big enough for any large corporation to refuse to be a part of. Thus the Greek economy will merely go underground if the government attempts to force all transactions in Greece to be in drachma, with everything being smuggled in and out of Greece and traded in Euros and drachma being used in place of toilet paper because toilet paper needs to be smuggled in and paid for in Euros.
Oh, yes, Bank of America and JP Morgan and Credit Swiss et al will do what with all the drachma the Greek government printed and sends them to pay off their government debt in full?
Unless the Greeks can find something to export and earn EUR to pay for the imports, then all the EURs will simply leave Greece, leaving nothing behind.
No company on earth outside of Greece will accept Drachma for real stuff, like oil.
Why has it become common sense that all Greek bank deposits will be converted (confiscated) automatically?
If all they wanted was their own currency and more inflation, then there would be no need to do that (rob their citizens).
Of course what they really want is to print money to extract revenue, which is only possible if the currency is also used for saving, but even after converting all remaining accounts, it might not be enough to avoid hyperinflation.
On another note, I wonder how much the Swiss need to print each day and what they are doing with all the Euros? I think they should consider buying gold. If Germany left the Euro, they could do the same. They’re afraid a new currency would appreciate and hurt the export, but it can obviously be as weak as you want it to be.
“Why has it become common sense that all Greek bank deposits will be converted (confiscated) automatically?”
Would you be willing to risk it? Even it there was only a 25% chance of a forced conversion, it’s a pretty drastic risk for a lot of people. Whereas the cost of cashing out is comparatively low risk.
What would happen if the Bank of Greece just cranked on the Euro printing press?
The Germans aren’t going to allow that. The Greeks can’t do it alone; and they can’t convince the others to do so.
Why can the Greeks not do it alone? I am not asking why they are not allowed to do it alone; that’s rather obvious. I am asking why they cannot do it. The Bank of Greece does in fact posess a completely legitimate Euro banknote printing facility, along with more subtle ways to increase the Euro M0 or M1. What are they (and I) missing?
When Germany declares Greece to be engaging in economic terrorism and declares war to defend itself, the NATO treaty will require Obama to invade and occupy Greece?
The fact that currency isn’t actually wealth.
“Wealth” is fuzzy and ill-defined. Hard currency in sufficient quantity will solve Greece’s acute economic problems for today, and I think today the Greeks are rather more concerned with “Can we muddle through until tomorrow?” than “Are we truly rich?”
In hindsight, giving Greece a hard-moncy cornucopia and saying “Never, ever dial it up to eleven, das ist vorboten”, may not have been a good plan.
Greece is geographically almost isolated from the rest of the EU. I think that such a step would cost them total economic blockade, which they can’t afford.
Greece has the largest merchant fleet in the world, and the best ports in the Eastern Mediterranean. They are not geographically isolated from anyone.
More importantly, there is no legal mechanism for an “economic blockade” in the Eurozone. If someone were to try and set something up on an ad-hoc basis, they’d lose pretty much all legal and moral authority over Greece’s economic shenanigans and have to make up the difference with purely practical enforcement ability.
And at that level, they’d run into the practical problem that Greece’s most convenient conduits to the rest of Europe run through the Balkans and Italy. The Balkans include an interesting mix of non-EU and EU-but-not-Eurozone nations, and is the biggest smuggling corridor in all Europe. Italy is a full Eurozone member with complete access to European markets, and just how do you think the Italians are going to respond to a “Let’s illegally blockade profligate spendthrift Southern European nations!” plan? You’ll also need to get Spain and Portugal on board, for that matter.
I suspect the Greeks can trivially afford to put “Made in Albania” labels on the bottles of olive oil destined for Germany. So unless the next step involves the French navy operating weapons-free in the East Med, I think your plan needs a bit of work.
OK, so your real question is why wouldn’t the Greek illegally beging running their euro printing press? Well, obviously they could, but it’s hard to see it as being a good solution because of rather severe and immediate countermeasures by the other Euro countries. A few things I think we would see:
1) Declaration of Greek euros as not being the same currency.
2) Immediate measures to distinguish non-Greek euros from “real euros”. Initially this would likely be some kind of stamp made on existing currency done through each country’s banking system. Eventually this would be done by changes in design of money and new plates. This process would take a certain amount of time so there’d be some confusion.
3) Immense political pressure would be put on Greece within the EU. There’d likely be some kind of retaliation against Greece so that it stops using the presses.
4) Greece would have zero credibility in the future for any kind of cooperative agreements.
5) The Germans would quickly move that in the future, the Euro Central Bank could not rely on national banks to maintain the currency, and demand all future euros be controlled directly by the ECB, and that the printing presses of ECB only be located in countries the Germans find dependable.
These are only the most obvious responses. Others could include some kind of sabotage done to ruin the Greek printing presses. Either by sending in some covert force, a computer virus, or something else.
None of these countermeasures will help Greece, and only increase uncertainty and harm the economy.
My real question is why the Greeks can’t begin unilateral quantitative easing or one of the many other schemes for raising their local euro-denominated M1, and resort to actually firing up the printing press only when they are backed into a corner by the inevitable bank run. That makes the countermeasures you describe rather less effective as a deterrent, because by the time Greece is backed into that corner they won’t be concerned by e.g. their future credibility.
Playing games with M1 is less obviously Pure Fiscal Evil than printing unauthorized banknotes, and the countermeasures you describe would cause substantial harm well beyond the Greek borders. So I doubt you’d get a European consensus for decisive, effective action until it was too late to do any good – and as you note, the action would itself take time.
I’m not sure of the mechanisms or treaty details, but the Greek printed Euros are marked and could be devalued separately (Greece notes marked ‘Y’ and are printed in other nations, too, reference below). How long does it take to print the currency? I saw a plan that said they would probably need to print marked Euros first, to start a ‘drachma’, then flip the switch when everything was ready. So, if they do that, then essentially they’ve created an unannounced drachma, which could get them some value prior to an official drachma (and, hey, maybe they’ve done this).
I wonder, though, couldn’t they just stand for the de-institutionalizing of their economy? If it was the United States of Europe, right, there’d be no national bank, the local ones would/might die (happening anyway) and get filled in by other institutions from, say, Germany, right? Since they want to get bailed out and not pay for it, just give up their economic sovereignty (no national bank, budget set by EU) and be done with it. This is a measure that should have been considered as part of the treaties. The US has enforced our union and that backs the currency in our less developed regions. EU has a carrot for good times but no stick for bad times.
I think there is a real possibility that Greece might default and then simply print their own euros. In that event the EU would first respond with bluster while they negotiate with the Greeks. After a while the EU will be able to outlaw paper euros with Greek serial numbers and euro coins with the Greek reverse. Finally, the EU will produce entirely different euro bills that the Greeks can’t produce. The “Greek euros” would become the currency of Greece (instead of drachmas) and would circulate at a steep discount to genuine EU euros. The whole farce could last for months and will be good for a lot of laughs.
First step, I think, would be for the Greeks to use something like quantitative easing to pump up their Euro-denominated account balances in Greek banks, without actually printing more Euros. That’s easier to rationalize as a temporary measure that you can fix up into something stronger and better next year. Also easier for the EU to genuinely resolve through negotiations.
If it doesn’t get quickly resolved, then sooner or later demands for actual Euro banknotes will empty the Bank of Greece’s vaults, and then a quick order to the print shop in the basement is seen as a necessary emergency response, not a planned misdeed. From there, your scenario looks disturbingly plausible.
You’re probably right, but these are uncharted waters. Normally the bulk of the money supply is held within the banking system, and for a while the Greek central bank could supply the necessary funds with “something like quantitative easing” (nice phrase). But these are not normal times and Greeks might want to have physical euros instead of “money” in the bank. As TC noted at the beginning of this thread, there already appears to be a slow run on Greek banks. Things might get dramatic very quickly.
The Greek central bank can physically print its own euros. This would seem to nullify any ECB threat to choke off the Greek banking system:
So if Greece defaults and goes back to Drachma, the government will still be spending more than it takes in taxes, but after the default they won’t be able to borrow.
Thus going to Drachma means inflation, which is basically the same thing as austerity – government will be paying out less (real) money. Actual non-defaulting austerity would not cut off government borrowing, so it might be less “austere” than massive inflation.
Plus do we know whether Greek social payments are not inflation-indexed?
Does Greece have any gold reserves?
Could Greece execute its own monetary policy, on a modest scale, without leaving the Eurozone? It seems to me that the government might issue drachmas, while announcing that the government itself will accept drachmas one-for-one with euros in payments to itself—tax payments, fines and court costs, payments for government goods and services, etc. If they didn’t issue *too many* drachmas, the ones they issued might trade at or close to parity with euros. The goal would be to expand the money supply in Greece, at least somewhat. Perhaps Greece, and other countries in the Eurozone, have committed themselves not to do such things; but, after all, treaties were made to be broken, and here there seem to be strong reasons of state for Greek defiance of Brussels. And isn’t it likely that they would get away with it?
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