Debating whether Greece should remain in the euro, while we still can

“I don’t want to hear your life story when you ask a question,” BBC presenter and debate moderator Zeinab Badawi warned the large audience at the Hellenic Cosmos theater in Athens on Tuesday night before the cameras started rolling for one of the most interesting discussions the city is likely to host this year. It was certainly not a night for personal tales. This was about the story of a country and its dramatic fall from grace and economic stability.

The subject of the debate – organized by Intelligence Squared – was whether Greece should remain in the euro or return to the drachma. What exquisite timing that the debate should take place on the same day the Eurogroup agreed on a new bailout for Greece, one which some think will be enough to keep the country in the single currency and others believe is bound to drive Greeks back to the drachma.

Arguing that Greece should quit the euro were omnipresent US economist Nouriel Roubini and University of London economics professor Costas Lapavitsas. In the other camp, former International Monetary Fund official Miranda Xafa and colorful British MP Denis MacShane argued Greece should remain in the eurozone.

Roubini has supported for some time that Greece should return to the drachma. He recently predicted the country could be forced out of the euro within a year. His argument on Tuesday night was just as blunt and consistent. The man famed for warning about the imminent financial crisis in the US when few others did pulled no punches in describing the economic destruction that Greece faces if it remains in the euro, despite the latest bailout.

“The medicine of the troika is making the patient sicker and he will die,” said Roubini. “You need jobs, income and competitiveness.”

He said the austerity measures that Greece has to adopt in order to qualify for further loans would send the economy into a death spiral that would make it impossible to conduct the reforms that the eurozone and IMF have demanded of Greece.

“Structural reforms in the short term will only make the recession worse so the debt ratio will become larger and the debt dynamics unsustainable,” he told an audience of some 1,200 people. “Even after the restructuring of Greece’s debt, the country won’t have growth, and it’s easier to do structural reforms with growth.”

Lapavitsas was also critical of the troika’s formula for tackling the Greek crisis. “The holy trinity of liberalization, privatization and austerity has not worked in Greece,” he said, adding that the projected growth rates of 2 and 2.5 percent of gross domestic product for the latter half of this decade would not have an impact on the country’s unemployment problem.

“Greece needs to cut loose,” said the Greek economist, arguing that as long as Germany keeps its wages low, Greece would have trouble being competitive.

Lapavitsas identified the future of the Greek banking sector as they key obstacle in the way of a euro exit. He said the new bailout would provide the banks with 30 billion euros but would not give taxpayers any control over how they are run. His suggestion that banks should undergo a period of “sustained [public] intervention” did not sit well with some people in the audience.

MacShane provided the night’s funniest moments by referring to French President Nicolas Sarkozy’s “high heels” and economists as “knowing 365 ways to make love even though they have never been with a woman.”

The Labour Party politician struck a note for European solidarity, expressing fear that if the eurozone let Greece tumble to its fate, it would be the beginning of the “balkanization of Europe.”

“Orthodox economic thinking outside Greece should not force the country out of euro,” he said. “Giving the drachma back to Greece won’t make any difference. Europe needs a change of monetary policy.

“European solidarity is not about letting Greece die. That is what staying in the euro is about.”

Xafa said that Greece was paying the price for deluding itself when it joined the euro. “Joining the euro created the misconception that the Greek standard of living could converge with Europe in one leap,” she said. This could not be fixed through devaluation, Xafa argued, but only through structural reforms. This means that more pain is inevitable, she added, while stressing the “chaos” that a euro exit would cause.

“With or without the drachma, the Greek economy will have to suffer a decline in wealth and GDP,” the ex-IMF official said. “The new program allows Greece to have a soft landing.”

The evening’s most interesting exchange came when Xafa raised a point that foreign economists often miss when they weigh up the pros and cons of Greece returning the drachma.

“The corrupt political establishment led Greece into this mess,” she said. “If you offer the printing press to them, they’ll go back to business as usual.”

Roubini, stressing that the social effects of a depression would make it impossible to remain in the euro, countered that membership of the single currency, which came with certain fiscal guidelines, did not prevent Greek politicians running up the country’s debt. He said that if Greece had its own currency, the market – from which the government would have to borrow – would impose its own form of discipline.

“The problem is not the politicians, they’re an outcome of the process,” said Lapavitsas, who encouraged the audience to form new political movements. He admitted that he is considering getting involved in the political process himself.

The debate emphasized that the euro is very much the story of Greece. How it joined and where things went wrong tell you almost all you need to know about the country. How will this story end?

An audience poll suggested that 75 percent were in favor of staying in the euro and less than 19 percent against. The problem, though, is that unless the situation improves substantially in the months to come, the question of whether Greece should use the euro or drachma may not be one that Greeks ever get the chance to answer.

Nick Malkoutzis

3 responses to “Debating whether Greece should remain in the euro, while we still can

  1. The arguments in favor of Greece’s leaving the EZ become more and more plausible as the Greek economy simply can’t stop shrinking. My own primary argument in favor of Greece’s staying in the EZ is more political than economic: I would fear anarchy. Let me propose an economic argument, too.

    I think Greece has not given the Euro a fair fighting chance yet. All we know is that Greece’s first go at the Euro (2001-10) ended in disaster because the spending abroad exceeded the earnings from abroad very significantly. What if Greece could have avoided that? Put differently, what if Greece could avoid that in a second time around?

    What seems clear to me is that if Greece is to have a second chance with the Euro, free market forces will have to be “managed” for a while. For example: if the EU-freedoms of free movement of goods and capital are not “managed” for a while, Greece will not have a second chance because Greeks will continue to buy cheaper products abroad and to transfer their money to offshore accounts (or under mattrasses). Certainly I would do that if I were a Greek.

    A fair second chance would be to establish a Free Trade Zone near a concentration of unemployment (probably near Athens) and to allow entrepreneurs to start new production there at whatever terms and conditions they require in order to make a decent profit. Initially, they should focus on the import substitution. At a later stage, they should go for “new industries” and exports. Import taxes and capital controls would be (temporary) accompanying measures.

    Now, I doubt that the employees there would earn the same wages as their counterparts in, say, Germany but I have to assume that their wages would be significantly higher than the minimum wage and/or unemployment benefits. Why? There are 2 factors requiring lower wages than in Germany: smaller economies of scale for sure and lower productivity perhaps. I fail to understand that their impact could be so large as to make it impossible to offer reasonable wages in Greece.

    Of course, free marketers will have heart attacks when they hear the term “managed economy” because they will immediately confuse it with a planned economy. I am a free marketer, too but I am sure even Friedrich von Hayek would favor a temporary economic framework which is not totally free but which assures that, when its mission is completed, the free market forces can work constructively. “Infant-industry protection” is the buzzword for that.

    • Thanks for more interesting suggestions, Klaus. I fear that the ‘ifs’ that line Greece’s euro path are stacking up all the time and there is not decisive action to eliminate some of them.

  2. “The corrupt political establishment led Greece into this mess,” she said. “If you offer the printing press to them, they’ll go back to business as usual.”

    Fair point. Then give the printing press to the people !

    If Greece leaves the eurozone, it is totally feasible to transform gradually the billions euros/drachmas greek banks owe to the Bank of Greece/ECB into deposits, through a citizen income. This process could take something between 5 or 10 years, depending on the inflation pressure.

    This would provide an efficient stimulus for the greek economy while reinforcing the banks balance-sheet. Not to mention, that would fight the poverty…

    I cannot see any (big) problem with this idea, but i might be missing something ?

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