One of the great short hand expressions for any government to justify restrictive spending on its population is that “There is no free lunch”. (The other great economic wisdom, of course, that money does not grow on trees)
Now, everybody seems to believe that, even though for the first 18 years of their live they only had free lunches. It means, of course, eventually you will have to work for your lunch, ideally until you retire, and that seems for some to be the whole purpose of life.
However, even then free lunches continue sometimes.
There seems to have been one recently when the Greek in the office invited his fellow workers to celebrate his birthday at the local restaurant. All 18 co-workers (from different European countries) agreed enthusiastically. Everybody enjoyed their meal and their drinks, everyone had a good time, and then it was time to pay. We will all be familiar with the situation.
The bill arrives. Euro 440 for all. That is 120 for the drinks, 320 for the food.
The Greek insisted, as he had invited everyone, that he would pay.
“Oh no,” everybody else said “it is your birthday, we will all pay your share.”
Note, of course, that in this negotiation everybody insists that the other should have a free lunch!
Finally, the Greek says: “Ok, I will let you pay for the Euro 120 drinks, and I make sure that I pay the remaining 320!”
Sadly, we do not know the outcome of the negotiations. At that point, negotiations stalled. They still seem to be in the restaurant, making up their mind, who should pay.
(In fact in real life, in this situation, we have now international arbitrators arriving from the US, Treasury secretary Jack Lew last week, insisting that the drinks bill should definitely be paid by the others! As the Greek cannot possibly pay for it, even if he is given years to pay in installments. The whole cost of the meal will otherwise land on the 18 other countries, and the Greek will never want anything to do with the rest of the 18 Europeans, trying to find friends further East. Jack Lew would not like that.)
Clearly not everybody is that reserved when it comes to enjoying a free lunch.
“Default is the weapon of the poor” says Lapavitsas “We will not pay anything back.”
It is worthwile to watch this video of one of the main supporters of the Grexit (traditional style: new currency with devaluation – other Grexit options are available), University of London Economics professor Costas Lapavitsas. It is all in English, he is pretty angry, his analysis worth listening to in the 30 minute speech. We now do not have to worry, that the Greeks do not understand that the agreement they have voted on will mean anything else but pain, Lapavitsas tells us. An agreed 2%-of-GDP increase in taxes will lead to a further fall in output and increase in unemployment. He also knows what we know the “alleged 86bn bail-out” is nothing of the sort. No new money for Greece. The only new money is 25 bn for the private banks.
But the private banks will get further funds. The trust fund under foreign control to privatise state assets will sell them and then use the money for a further recapitalisation of the banks. The first 25bn from privatisation is to be used. Lapavitsas says it will only make 25bn, in which case there are no further funds from it to reduce Greece’s debt. Greece will also be under the full control of foreign powers, who will make sure that the country is fully compliant with all terms and conditions.
That is no Brest-Litovsk peace, as there is no time to regroup for the left wing forces.
Lapavitsas therefore advises Grexit, a new currency. He also says that no money should be repaid, default is the weapon of the poor. This default for the Greeks will lead of course to the free lunch, as losses of 440bn (120 Target2 liabilities and 320 Greek govenrment debt) will then not be repaid. Europe will pick up the bill.
Lapsavitsas says that there will be some pain, for the first few months.
Greece will need plans to deal with petrol/pharmaceutical/food issues, he will want to nationalise the banks, replacing management as soon as possible.
So, a new currency is be issued 1:1, eventually he thinks the currency will be about 15% lower compared to the Euro, having lost more value immediately after a Grexit, but then recover.
In general his analysis is pretty good.
So there is one free lunch fan, Costas Lapavitsas, but he has been, and he still is, the minority view in the Syriza administration. The Greek government is still in negotiations trying to pay for the lunch.
Are there any other ways to describe a Greek Exit?
The whole thing has, of ocurse, not come unexpected. Even in 2011 there was talk about a possible exit strategy, in fact the Wolfson prize of £250,000 was awarded to the describing the least disruptive way of a Greek exit from the eurozone.
At the time I seriously thought of entering, alas I did not, thinking that it would be a waste of effort, as my credentials were not sufficiently sound to be taken seriously, even though my ideas would have been better.
In the end the former chief economist of HSBC and UK treasury advisor Richard Bootle won. (Hey-ho, as if he had needed the money!) So let us have a look at the proposal. It is often now touted about in Britain as the blue-print for a Grexit. A straight forward proposal to issue your own currency, devalue by 40% and default on 80% of government debt. It takes about 180 pages to make that point, although, to be fair, there is lots of useful background information in that paper. (How long does it take to print a new currency, possible timetable for Grexit towards exit day, how to deal with assets and liabilities, who wins, who loses, etc.)
But nothing revolutionary in that paper. In fact the 80% Greek government debt default suggested comes to about 250bn. Well, Bootle received £250,000 to suggest to the Greeks that they default on 250bn of Greek debt. And stuff their creditors. Another example of a free lunch, I think.
The jury seemed to think that a quarter of a trillion debt write-off is not disruptive. Well, I am not so sure, and I would not like to try!
Now, I have said this before, when I first on this blog took issue with Bootle’s suggestion, Greece does not need to devalue its currency any more, as it has now a balanced current account, and much lower wages than in 2011, when this proposal was originally written. Thanks to previous years’ devaluation it is competitive on world markets on a cost basis now, its exports are slowly rising! So a devaluation of its currency is not necessary.
So Mr Bootle’s plan is well out of date and should be scrapped.
So what if a another 250,000 prize was put up, by Mr Schaeuble this time, for an updated plan to allow Greece to exit from the Eurozone with its own currency?
What would my plan be?
I would suggest that Greece should just start issuing its new currency the Drachma at 1:1 to the Euro.
So the Greek government should announce that all state employees would now be paid in Drachma from 2016 onwards, all new contracts would be paid for in Drachma, and that all tax could be paid in Drachma and Euro.
Everything else stays the same, all monetary value in Greece is still expressed in Euro. All state employees need a drachma account at their bank, of course, and everyone who wants to sell to them, too. That would allow retailers to accept the Drachmas these employees will have to spend when they receive them from the government.
Greece should also, before a new currency is printed, issue about 30% of the salaries as a cash substitute.
These cash substitutes for Drachma notes would be issued, for example, as 100 Drachma Future Taxnotes. They would look similar to a 100 Euro Note. These will have a redemption value for tax liabilities in 2 years’ time of 102. So the 100 Drachma Future Taxnote would say something like this: “The Greek State accepts this note as payment of taxes from January 2018 to the value of 102 Drachma or 102 Euro.”
So, what would happen? The new currency Drachma would keep its value to the Euro. Any shop will accept it.
The shop might
(a) use it to pay its employees or suppliers,
(b) keep it until 2 years time, when its taxes are due.
That would be it. That would be the plan. Nothing else.
And who would pay for the Greek lunch would still be unclear, in a situation like that. Probably less disruptive than what Bootle suggested.
I think my idea is easily worth 250,000! Although, of course, slightly shorter than 180 pages.
Well, time for my lunch now. Paid for, of course!