Why - and how - Greece must quit the euro
By Daniel Guéguen (*) | Thursday 16 June 2011
By wishing for the nomination of a “European minister of the economy,” European Central Bank President Jean-Claude Trichet has discovered, ten years after the creation of the euro, that our single currency is in essence a federal instrument. This is demonstrated every day by the fact that support measures for Greece and even the restructuring of the debt are creating more problems than solutions. Only a programmed exit from the euro will offer a durable and globally positive solution for Greece, as well as the European Union.
The ‘Greek case’ is a perfect example of a strategic mistake. The first cardinal mistake was to accept the entry of the drachma into the eurozone without Greece being able to fulfil any of the required criteria. Second mistake: refusing to sanction Greece when the figures it presented turned out to be wrong. ‘We’ preferred not to see anything.
The third mistake is structural: thinking that the single currency could last on the long run without any fiscal harmonisation, social harmonisation, budgetary coordination or any economic government of the Union.
Adjustment mechanisms have disappeared
Over the past few years, some countries have maintained and even increased their international competitivity: Germany and by extension the former Deutche mark zone are the best example. Other countries – we know which ones – have suffered backlashes in global competition. The first group can easily deal with a strong euro, the second group, however, finds itself strangled by an overvalued euro in relation to their weak economic performances.
In the past, competitivity gaps were rubbed away on a regular basis: some accepted to re-evaluate their currency out of solidarity and others to devaluate to be breath again. These adjustment mechanisms, which were in place for forty years and proved to be functional, disappeared with the introduction of the euro.
It is high time to admit that the solutions that have been tabled since 2008 to ‘save Greece’ have failed. What is worse, the situation deteriorates every day. The volume of the debt is far from decreasing, on the contrary, it still growing with interest rates on the increase. Incidentally, the idea that Greece could cede €50 billion worth of assets or regain its competitivity is perfectly surrealistic. Nothing like that will happen in the short or medium term.
Restructuring the Greek debt suffers from the same symptoms: what will the future hold for bank credits? How can a chain contagion be contained? How can Greece enter a virtuous cycle? The current debate offers no solutions to these questions.
A European minister of economy is not a solution
The idea simultaneously put forward by Trichet, Verhofstadt and Barnier is nice but it does not solve anything. One swallow does not make a summer. And as we can already observe, an EU minister of external relations does not make European foreign policy.
The European Union does not need a minister of European economy but to return to a federal vision of the European construction process, which is required by a single currency. Now, everything is going wrong with a weak Commission, an overly consensual Parliament and member states focusing on their national interests. To put it short, everyone is focused on their own problems while the European House is burning.
The only way out for Greece: quitting the euro
‘They’ will tell us: it is technically not feasible. If Greece quits the euro, it will only devaluate to mechanically increase an already unbearable debt. The argument is strong – technically exact – but it does not convince me. The Greek case is not a technical but political question and it has to be dealt as such.
This means, first of all, secret negotiations to announce to markets and to public opinion a long-term plan, complete in all its elements. One of the main elements would be to announce that Greece is quitting the euro and that the procedure would be completed within one year, the required period to print the coins and notes and to adapt the payment terminal.
The second element of the plan consists of devaluing Greek currency by 40% and to increase the Greek debt from €350 billion to +/- €500 billion. The European Central Bank and the eurozone countries would then simply accept to declare the debt of €350 billion void, to make it shrink to €150 billion, which would amount to +/- 60% of the Greek GDP.
The involvement of creditor banks in the balancing plan is an important but secondary question to be dealt with on a microeconomic level in order to avoid cascading insolvencies. The most important question is a macroeconomic matter and consists of strictly regulating rating agencies and other actors in the financial value chain.
Once liberated from the euro, Greece will keep its full EU membership. But what it will regain is its democracy. In fact, what are elections in Portugal, Ireland or Greece useful for other than adopting an austerity plan without any other alternative. Back to its drachma, Greece will choose its Socialist or Liberal destiny and will assume its choice.
The €350 billion of abandoned credits are nothing compared to monetary circulation at EU level, however, it will permit Greece to regain its dignity and the Union to deal with a problem that has become explosive, with solidarity and pragmatism.
(*) Daniel Guéguen is author of the book ‘The euro: Europe’s construction or destruction’, published in 2004