Greece: Exiting the euro

by michael roberts

Should the Greek left argue strongly and first and foremost for Greece to leave the euro as the best way out of its mess?  After all, the Euro leaders, the Troika and the private bondholders are imposing a humiliating and damaging degree of fiscal austerity on the Greek people through the upcoming 'bailout' package.  Would it not be better to be free of the 'imperialist euro' currency and let Greece stand on its own?

Argentina is often cited as an example of a country that escaped the tyranny of a 'foreign-imposed' currency (the US dollar) by ending its currency board, a device that set the amount of Argentine pesos automatically in line with the country's reserves of dollars.   In the crisis of 2001, the Argentines eventually defaulted on their debt and ended the currency board.  Subsequently, after a deep economic slump., the Argentine capitalist economy recovered and raced ahead.  Thus breaking with the euro and devaluing the Greek currency might offer the same way out.

Argentina's former central bank governor at the time, Mario Blejer discussed this issue in last week's Financial Times (URL).  Blejer commented: "Given the grim outlook for Greece, many analysts suggest that it would be better for Greece to exit the euro zone. They often cite Argentina’s exit from its currency board in 2002 as evidence of the benefits that would accrue to Greece if it reintroduced its own currency.  It is true that, following the peso devaluation and after a painful (but short) adjustment period, Argentina enjoyed six years of rapid growth.  But Argentina’s experience was singular. Strong export prices resulted in sustainable external surpluses.  Greece, on the other hand, cannot rely on favourable external conditions and is already in a deep recession.  In practice, moreover, Argentina had no choice after defaulting but to ditch its peg, since the currency board was a unilateral arrangement that did not envisage counterparty support or institutional safety nets. Unlike Argentina, Greece belongs to a formal multilateral arrangement that could provide the intensive care and official finance needed to smooth the adjustment."

Blejer goes on to state that "an analysis of the costs incurred by Argentina strengthens the case for Greece to remain within the euro zone."  Once it became clear that Argentina was going to devalue the peso, there was a run on the banks which lasted for over 18 months and used up two-thirds of dollar reserves.  Capital controls had to be imposed, which then made it impossible for businesses to fund their operations.  The government fell.   And remember Argentina had never stopped using its own currency, the peso.  Greece has, so it would have to introduce a new currency to replace the euro.  Who would want to be paid in this currency and who would agree contracts in it?  Blejer concludes:  "in normal circumstances, in order to cut real wages (and this is what central bankers want to do - MR) , devaluing the currency is more palatable than reducing nominal wages.  But when devaluation requires exiting a monetary union, the resulting financial implosion has to be factored in".

In other words, a national capitalist economy can try and escape a depression by devaluing its currency to gain competitive advantage in world markets, but it is much harder to do it without major disruption when there is no currency to devalue and it means coming out of a wider currency union.  Blejer did not add that, eventually, devaluation would not work, unless a national capitalist economy can improve competitiveness and raise exports to pay for foreign investment.  Without that, devaluation can only make the foreign debt burden even worse.  Indeed, competitively priced exports will be difficult to achieve if so much capital and raw materials must be imported to make those exports.  And Greece's import component of exports is high.  Indeed, the experience of five recent devaluations of economies in crisis (including that of Argentina) shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels (www.cepr.org/meets/wkcn/1/1621/papers/Rebelo.pdf)  - that's no picnic.

None of these arguments are put forward to suggest that Greece staying in the euro and accepting so-called 'internal devaluation' through wage and pension cuts etc is 'better'.   It's just that neither external nor internal devaluation will save Greece from years of depression and a generation of lower living standards for most Greeks (see my points on Latvia in my last post, Greece: a Sisyphean task, 13 February 2012).  Devaluation is not a quick way out.  As Blejer says "what is required is not an abandonment of the euro but a framework adapted to the specific context of the Eurozone and Greece itself".

Of course, what Blejer means by a "framework" is lowering wages, privatising the state sector, reducing taxes for the corporate sector (especially big business) and 'deregulating' labour markets i.e. the super-exploitation of the Greek people to raise profitability.  But the left could also find an alternative policy to exiting the euro where Greece negotiates a full default on its debt to private and foreign bondholders; takes over the banks; and uses the savings from bond and interest repayments (€17-20bn a year) to start state directed investment in jobs, technology and funding small businesses, while staying in the euro to protect the savings of the people from destruction, keeping down inflation and avoiding a rise in foreign debt.  The question of exiting the euro then becomes an issue for the Euro leaders to impose (and to be resisted by a campaign within Europe), not as the main policy plank of the left.