How to turn the table

Greece ows Euro 240 billion to its European creditors. Yesterday, talking about the Endgame, I suggested Greece should declare a moratorium on its debt. And incidentally, Jeffrey Sachs, in an article for Project Syndicate with the same name, also said that the Greek government should not give in.

How to repay when declaring a moratorium:

So let us assume Greece declares a moratorium on its debt to Europe, what should it say?

Greece could commit itself to repay the 240 bn it owes over the next 12 years, at 20 bn each year. That would, of course, hardly be a moratorium, the current loans stretch much further into the future. But this offer of the Greeks should come with a catch: only if the Europeans buy additional goods and services, or provide foreign direct investment, of 20 bn a year. That is 20bn over and above the current level of exports to these countries.

So Tsipras and Varoufakis should say to the Europeans, you buy the additional goods, and we will pay. If you do not, we will not. It is as simple as that. So European governments, if they were serious about wanting their money back, could set incentives for their citizens to buy Greek goods or come on holiday in Greece. It would hardly cost them anything to set these incentives.

Such an offer to repay the debt should be made. So nobody could claim that the Greeks are not serious, in fact it would offer the Eurozone a rapid debt reduction strategy.

Can 240bn be repaid in 12 years?

What if the Eurozone countries took the Greek government at its word, could this be delivered?

Currently GDP in Greece is 180 bn. If 20bn additional exports were added, the GDP would stand at 200bn.
This would increase its currently balanced current account to a surplus of 20bn. It would lead to a massive reduction in unemployment, perhaps 0.5 million from over 1 million at the moment. The tax base would grow, and government expenditure (unemployment, pensions subsidies) would fall. Clearly, taxes would still be increased to deliver a 20bn loan repayment, but that would be considerably easier in a rapidly growing economy.

At the moment the Greek government raises taxes of 80 bn. It would have to raise taxes of 100 bn, to repay the 20bn of debt. The tax rate of GDP would be raised from 44% to 50%. But because the pie is bigger, these taxes should be easier to raise. When the Greeks had previously 3.5 million working, now it would be 4 million. So there would be a lot more money in the economy to pay these taxes.

An additional 20bn in the Greek economy would mean a direct one-off rise of GDP of 11%, a nice change after 4 years of the economy contracting. It would probably be bigger, because of fiscal multipliers. The current account surplus would be 10% of GDP. That is even more than the export champions of the world Germany.

The GDP would not grow further in the following years, if this 20bn additional export over current levels were repeated every year. However, employment would still be substantially higher, and government finances a lot more sound.

How realistic is it?

In practice, it is unlikely that the Greek economy could deliver such a rapid rise in one-off GDP growth, so it could be tapered over 2 – 4 years. But then it is equally unlikely that the Europeans actually wanted to help the Greeks and enter into such an agreement. It is a shame, because, as this example illustrates, increasing exports is actually the only way to repay the debt.

And Greeks would provide these goods and services, the additional olives and holidays, to the Europeans effectively for free. Well, the citizens pay for them, enjoy them, and their governments get the money.

The extreme alternative is always that Greece defaults on its debts completely. In this case the citizens of Europe do not get anything from Greece, no free olives or holidays, but have to pay off the debts of their governments nevertheless.


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