First of all: It is not anymore shortly after midnight. As we speak, Greek debt is in default. A situation unheard of for the European Union. However, the game is not over yet and not all is lost, if… if we’d pull ourselfes together and focus on some basic economic facts. Rather than acting predominantly in view of someone’s individual (or collective) targets for re-election. Or to please street and dinner-table talk.
Since I posted the following in German language (July, 5) some things have happened: The Greek people said NO, THANK YOU! to the simple question of… well, I never got it what the actual question was. Whatever, the parties consigned to negotiate a deal did not give a shit anyway and continued to negotiate. And guess what? A new proposal for a compromise is on the table. And the game is on again with the Greek parliament and each of the other European member states having to discuss and agree, disagree or whatever to make this thing work. As I am writing these lines, latest news is about a hell of discussion battle going on in the Greek parliament. Great for TV talk shows.
To be extremely honest here: I am tired of politiciants, journalists and other wannabe experts sitting in on these TV talk shows – paid by TV license fees – and penetrating me with their mostly half- or uneducated bloody views. Therefore, once and for all and in English (and may it only be for the records), this is what we need to do. And I am not a politician, and therefore, my comments are not politically correct in the strictest sense but here we go:
1. Maybe more a behavioral guideline: All governments have to abandon their desperate efforts to make it look like they stick to whatever they promissed their voters in the first place. It can be taken for granted that most of them were ill-advised or misinformed at best or just lying in favour of their respective election campaign chances at the time. If there were any pills for a collective political amnesia, I’d be more than happy to provide prescriptions at no extra charge.
Why? Because, mistakes in the past must not be (or continue to be) obstacles to making the right decisions going forward. We are where we are.
2. To the nitty-gritty: A temporary stand-still on all outstanding Greek foreign public debt requirements (e.g. ECB, EU and IMF debt). In case – as has been hinted at by the IMF in the past – that certain regulations should prevent the IMF to agree to such proceeding the EU would have to step in and discharge the IMF debt.
Why? Lenders to Greece have (finally) to realize: All the funds provided to this country in the past have been spent. They have been spent for – from an economic point of view – inappropriate purposes (i.e. by and large to repay foreign bank debt. If you think about it, what has happened here is that foreign bank debt was exchanged for public institutions debt. Without having any meaningful real economic impact). This cash has been spent nonsensically and is gone. And it will not be recoverable in the near future. Where should it come from, if the underlying economy is far from self sustainable in terms of cash generation? So, the decision is either to write-off your bloody useless receivables and walk away or… (which will lead us to step three in a minute).
The termtime of such stand-still agreement has to allow for the time it takes to establish a macroeconomic structure in a way that the Greek economy will become cash generative and growing, i.e. we are looking at ten maybe fifteen years from now on. (In my earlier German version of these remarks I suggested five to ten years, but looking back I may have been a bit optimistic there).
By the way: We are talking here about public intitutions debt. Any private obligor (e.g. in the course of existing export financings if there are any) have to be treated differently. This is among other things to rebuild confidence in a New Greek Economy.
3. Providing funds in the amount of X for a capital expenditure program, which over a certain period of time will build-up macroeconomic structures to generate cash and economic growth in a sustainable way.
Capital expenditure (‚capex‘ i.e. real economy investments)
Production (together with capex leading to the creation of new jobs and growth in Gross National Product or whatever the EU target Definition Of the Day may be)
Distribution of products and services (leading to corporate profits) and – eventually –
tax revenues (therefore, an effective, fair and transparent taxation scheme has to be urgently introduced).
This is the chain or ‚course of action‘ if you will that we need to build (sadly enough from scratch in many areas it would seem). This is how an economy works. So, either write it off and walk away or make it bloody work.
The amount required for such a capital expenditure program, it’s initial allocation and payment authorization has to be determined and executed by a project team under EU leadership (with IMF and ECB if applicable). For the time of the stand-still agreement major macroeconomic and fiscal policy decisions will not be taken by the Greek government.
Why? It has to be made sure, that any new funds get invested in real economy projects rather than end up getting merely consumed by such areas as corruption or so-called financial intermediaries (such as banks). Unfortunately, when it comes to policy making the Greek governments of the past so far have not produced a viable track record in this regard.
4. GREXIT or not GREXIT. That is the question. Well, is it really?
The introduction of a new free floating Greek currency – be it temporary or not – would have advantageous effects in respect to significantly lower production costs (when compared to the rest of Europe) and a relatively sharp increase in exports. Also, this would make Greece a lot more attractive for foreign investments. All-in, it would definitively accelerate the process of the underlying macroeconomic recovery (as outlined above).
On the negative side, uncertainties about the expected performance of a new floating Greek currency versus EURO or USD are always bad news for foreign investments. Also, transaction costs and efforts needed to unwind EURO denominated cross-border contracts will be substantial. And lets not forget: This is all about human beings. And fellow Europeans, so to speak. This is not about some simple economic production engine where (once you have identified where) you fill in some oil on the left side of the engine in order do get some steam out at the right side. Traveling and bying products abroad would almost definetively be unaffordable for most of the Greek people. Do we really want this? Only because some misguided politicians (to put it mildly) made some really bad, I mean REALLY BAD decisions in the past?
Sure, there are ways to mitigate the negative social impacts. We also might consider a sort of conditional tie of any such currency to the EURO (e.g. by way of a free float within a certain range to the EURO). However, any such monetary micro-mechanics issues are in my view secondary to the basic action needed as I have outlined under sections one through three of this piece.
Finally, the creation of a New Greek Economy (and it’s nothing less than this we are aiming for) needs a sufficient monetary supply provided by the ECB (and/or the Greek Central bank if applicable). And it should go without saying that monetary policy and money supply base in order to provide funds for sustainable economic growth need to be allocation-neutral (i.e. not leading to economic misallocation of financial funds).
So, this is what I wanted to say about the Greek crisis and the potential for a New Greek Economy…
Hamburg, July 15, 2015