Athens must stand firm against the eurozone’s failed policies / FINANCIAL TIMES

February 15, 2015 2:36 pm

Athens must stand firm against the eurozone’s failed policies

Wolfgang Munchau / FINANCIAL TIMES / http://www.ft.com/intl/cms/s/0/175f6634-b2d3-11e4-a058-00144feab7de.html#axzz3RzQWpBvP

One of the riskiest options would be a formal exit from the currency union

The Greek finance minister can expect a frosty reception on Monday where he will confront his eurozone colleagues in another ‘high noon’ European showdown. My advice to Yanis Varoufakis would be to ignore the exasperated looks and veiled threats and stand firm. He is a member of the first government in the eurozone with a democratic mandate to stand up to an utterly dysfunctional policy regime that has proved economically illiterate and politically unsustainable. For the eurozone to survive with the current geographic remit, this regime needs to go.

Of course, for Greece to stand up to the EU policy elites is risky. The consequences of a failure to agree a deal have to be well understood. Greece might risk a financial collapse, and with it a forced exit from the eurozone. The concrete issue under discussion is a new loan to Athens to cover its funding needs for the next few months. The argument is not really about the money. It would only take a couple of economists in a pub with a pencil and a few beer mats to do the sums.

The dispute is about the packaging. The Greeks want a simple bridging loan combined with an implicit acknowledgment that the previous support programmes have failed. Others disagree. The Germans support austerity on ideological grounds. The Portuguese oppose any deal for Greece as they have taken their austerity medicine and did not stage an insurrection. And the Lithuanians are saying: we are even poorer than you are. Why should we bail you out? And so on.

So what should the Greek government do? They should stick with their position not to accept a continuation of the existing financial support programme. By doing this they would no longer be bound by self-defeating policy targets such as the contractual requirement to run a primary budget surplus of 3 per cent of gross domestic product. For a country with mass unemployment, such a target is insane. It would, of course, be better for this nonsense to stop while Greece remains in the eurozone. But the most important thing is that it has to stop.

If this is not feasible, Athens would need to prepare a Plan B. This does not necessarily mean a formal exit from the eurozone, which would be one of the riskiest options. There are smarter choices to pursue first.

The most sensible one is the introduction of a parallel currency — not necessarily paper money, more like a government-issued debt instrument that can be used for certain purposes. A number of economists have been thinking along these lines. Robert Parenteau, a US economist, has proposed what he called “tax anticipation notes”. These are IOUs backed by future tax revenue. Such instruments exist in the US at state level. They act as a tax credit that allows governments to run a fiscal deficit until the economy recovers. With such an instrument Greece could abandon austerity without abandoning the euro.

John Cochrane, a conservative economist at the University of Chicago, also wants the Greek government to print IOUs. They would be electronic money, not necessarily cash and would be used to pay pensions and other transfer payments. The IOUs would fulfil one of the core functions of money — a medium of exchange. You can use them to buy food in the grocery store or to recapitalise parts of your banking systems.

And what no one is saying — at least not in polite company — is that once this system is in place, you can default on the official European creditors. What can they do? They cannot eject you from the eurozone. They have no legal means to do so. They cannot kick you out of the EU either. They still need your assent for treaty change, or any policy requiring unanimity, such as the renewal of the sanctions against Russia.

The riskier alternative would be a hard exit — Grexit. This is an option Greece should try to avoid because it is hugely disruptive. But the scale of the downside of this, at least for Greece, depends on how it is managed. Grexit would be potentially more dangerous for the eurozone itself because it could be a seen as a template for others, especially in the absence of an economic Armageddon in Greece. Yet, while not desirable, Grexit would still be preferable than the status quo.

The worst-case scenario would be for the Greek government to blink first, and accept defeat. If Syriza were to be co-opted into the policy consensus, the only political party left to oppose these policies would be Golden Dawn, a neo-Nazi party.

My preference would be for the eurozone as a whole to abandon the failed policies of the past five years, and move on. If that proves politically impossible, the second best option, for Greece at least, would be a semi-exit with a parallel currency and a default on official creditors only. Either way, they will need to stand their ground on Monday.