Greek referendum opens door to financial freedom
As an American baseball player said: ‘It’s déjà vu all over again.’ Four years ago, on 28 June 2011, I published an article urging George Papandreou, then prime minister of Greece, to hold a referendum to ask the Greek people if they wanted to remain in the euro.
‘Not every creditor deserves a break,’ I wrote. ‘They should have known it was risky to lend to Greece. Let them bear the cost.’
In October 2011, Papandreou announced his intention to hold a referendum that December, but was talked out of it. His party, Pasok, never recovered.
Four months ago I wrote to urge the new party in power in Greece, Syriza, to hold a referendum. ‘Like Papandreou, but with still greater urgency, Syriza can go back to the citizens,’ I stated. ’The government has to say, “We thought it would be easy to defy austerity. But we have found out that is not so. If we are to fulfil our promise to you, we have to carry out Grexit.”’
Alexis Tsipras, prime minister, called German Chancellor Angela Merkel and French president François Hollande at the weekend and told them he was planning a referendum rather than accepting the latest creditors’ offer. They tried to talk him out of it. He went ahead anyway.
Now the creditors have withdrawn their offer. The European Central Bank is freezing credit to Greek banks. The crunch point is here. Greek depositors are withdrawing money at alarming rates. Greek banks will be closed for an indefinite period and capital controls imposed.
Technically nothing has changed. In real life, everything has.
Greece is still in the euro area. On Tuesday it’s supposed to repay €1.5bn to the International Monetary Fund. On Sunday July 5, the referendum will decide whether the Greek people accept the offer (or whatever is still on the table).
But whether they say ‘Yes’ or ‘No’, it’s too late. Greece may face no choice but to default on Tuesday or soon afterwards. We can only speculate about the exact date and manner of default. The certainty is that as the ECB has shut the liquidity window, Greece must find money to replace the euro.
As the ECB will not provide any new money, it will have to be created. Greece will have to print its own currency (or, rather, for the time being, stamp a new designation on existing banknotes.) By introducing its own money – call it the eurodrachma or the new drachma (ED or ND) – Greece will embark on a path to freedom from the euro area.
This is not as novel as people may think. Previous monetary unions have broken up.
The British Labour Party had the problem of administering austerity in 1931. It refused and split. Soon after, the new coalition went off the Gold Standard. The British economy threw off the burden of linking sterling to gold and went on to enjoy a quicker recovery from the Great Depression than the Americans.
When the Americans in 1971 reneged on their obligations to buy gold at $35 an ounce, the Bretton Woods system of fixed exchange rates broke down and countries were able to depreciate their currencies without asking the IMF.
The Greek government has to decide the value of the ND/ED in terms of the euro. The Greeks could begin at par and let it float. There is no reason why the euro and the new currency should not circulate together.
The government has to pay salaries and pensions in ND/ED. It should use the euros it has to settle international trade until the new currency stabilises.
People who still have euros stashed away in cash will keep them saved under mattresses, but they will use ND/EDs for daily non-durable purchases. For higher value transactions, the euro may continue to be used. The government will have to renege on all international debt.
Since it has been managing a primary budget surplus, it should have some spare capacity to ease conditions. The additional fiscal freedom the government will have outside the euro area means it can choose to run a deficit to alleviate the misery of the last five years. It will not have access to the international capital markets for the time being. But it’s possible that some private equity funds or sovereign funds may view Greece as a good long-run proposition
Of course, the ND will depreciate. Inflation will erode some of the relief. But there is no reason to fear hyperinflation or a total breakdown of fiscal discipline. Greek citizens have been used to austerity, the government can run the economy fairly, combining a tight fiscal policy and a relatively easy monetary policy.
Outside monetary union, Greece regains the use of normal macroeconomic policy instruments. It can determine its own timetable for making structural reforms. After a tumultuous weekend, this may not look like a good news story. But it could turn out to be one.
Professor Meghnad Desai is emeritus professor at the London School of Economics and Political Science and chairman of the OMFIF Advisory Board
