Matthew Wilson

Written by Matthew Wilson

Matthew Wilson works as an English teacher in a Scottish secondary school. He likes to blog about education, politics, economics and books. He thinks that schools have to change and adapt themselves more to the needs of the pupil so that people can develop the talents they have, in their own way.

Fire Grexit

I’ve no qualification to blog about the crisis in Greece beyond regularly reading about Economics, but here are my uncertified thoughts anyway.

I think Greece leaving the Euro would be a big mistake. I’m not going to write all the things that would have to be done to make sure that Greece can successfully stay in the Euro as this would then be a very long blog; but Greece leaving the Euro would be a mistake.

If the Greeks returned to the Drachma and the Greeks know it’s going to happen, then they’ll probably start taking their Euros out of the banks. It’d be the sensible thing to do. The value of the new Drachma is going to collapse when compared to the value of the Euro: will it be worth 50% less? 60%? 80%? No one knows. Because the Drachma will collapse this means that the debts will increase overnight. So, a 100 Euro debt will suddenly become a 150 Euro debt; 160 Euro debt or 180 Euro debt plus interest. You get the picture.

How is Greece, and more importantly Greeks, supposed to pay that back? It already can’t pay its debts. And default could mean a major bank collapse across Europe as European banks that have leant to Greece incur further losses. This would mean further emergency action by governments, more spending cuts across the continent, increased bank costs and less funding for businesses: less jobs, less spending.

Ok. The Drachma’s dirt cheap. That’s good! Why? It means that Greece can boom on being a cheap tourist destination, becoming the place to do business because you can sell so cheaply and having cheap Greek labour (passing note: this is the model of many Third World countries). This will allow Greece to boom on the back of a cheap currency that makes its products less expensive.

There are a couple of responses to this. It all depends on what a Greek exit looks like. Is Greece leaving the EU? Or is it just leaving the Euro?

If Greece leaves only the Euro. Then Greece becomes the cheapest place in Euro town and it will boom, sort of. People will go to Greece for unbelieveably affordable holidays and business, especially European businesses, will be able to produce goods which they can sell cheaply because of the cheap Drachma. Yet there’s a price. Greece leaving the Euro isn’t going to take Europe out of recession, in fact it will probably tip it further in to recession.

The Euro will become stronger and this means European goods, especially German goods will become more expensive so the export boom that Germany’s been enjoying because of this prolonged Euro-crisis making high-quality German goods more affordable will dry-up. Less money, less jobs.

If Greece suddenly becomes the cheap place to do business, then what Greece produces so cheaply is going to effect other countries e.g. Greek olive oil, cheapest on the market, will start hurting the Italian olive oil producers, harming that country’s economy. And it will be the same over a range of products. These countries, especially Italy and Spain, don’t need their export markets hit as they struggle with their own debts.

Why would Greek workers stay in Greece? They can go anywhere in Europe and get better wages and since their debts are going to be in Euros why not get paid in Euros to at least have a chance of paying them back? Greece’s economic future will be bleaker as young people leave and…

Greece has a tax problem – people don’t pay the taxes they’re obliged to pay. When people flood out of Greece, they’ll have a bigger tax problem: no one to pay taxes! As for the impact on Europe, Greeks will be a cheap labour market adding downward pressure on wages across Europe and probably contributing to further job insecurity and less spending i.e. pushing Europe further in to recession.

If Greece leaves the Euro and European Union. Overnight not only will Greek debts shoot-up; they’ll also be paying more to access their major markets for their products. (Europe’s trade barriers will increase the costs of their products) Business will not flock to Greece; they’ll continue on their death-spiral with their debts continuing to rise. They’ll be crushed. A Third World country will have been created at the edge of Europe.

Years of European funding down the drain, never mind the suffering of Greek people as they have to wait for their economy to pick-up, if it ever does, after exit. And always, like the Sword of Damocles, the crushing burden of their debts above them.

When this happens, who’s to say what the political outcome may be? Greece is already being polarised between right and left political parties. The likelihood of this increasing as people’s suffering increases is certain.

This blog’s long enough, so my thoughts about what should be done to keep Greece in the Euro will have to wait, but my final point is probably the most important.

Europe is heading for debt-deflation at this rate which means absolute catastrophe. Greece is the thin end of that wedge and once Greece goes, Portugal, Ireland, Spain, and Italy are next. If Greece is allowed to go, then how can any of the others be saved? And the terrible consequences that Greek exit can potentially cause, increase massively for the likes of Spain and Italy.

The simple solution of Greece leaving and dealing with its problems is the most worst option.

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One Response to Fire Grexit

  1. Alexa says:

    The need for growth as a vlchiee that would take Greece out of the current crisis is tautological. Yet, what is for debate and needs to be debated is how a country like Greece that has been suffering from serious structural problems in its recent and not so recent economic history can achieve growth. The debate about whether to remain or not in the euro zone is important, but it will remain academic unless there is a concerted effort (with the help of the EU in this case) to fight corruption. To do that most of the energy and effort has to be spent on reforming the judiciary. The rules of the game are such that whoever “screams the loudest” has better access to the media and the benefit of the judiciary system that is inherently incapable of ensuring a framework on which economic reforms can take place. Without contracts that are enforceable for all the parties involved, it will be futile to introduce reforms. The latter will be unravelled by the inability of the courts to enforce these contracts. For the new reality to become understood as something that requires new bold reforms to open up highly regulated markets and allow for productivity convergence between the public and private sectors, people need to be convinced that the rules of the game apply to all concerned. Until now as we speak, any attempt to bring individuals to justice who have either stolen public funds by not returning huge sums of collected VAT to the government, let alone the known income tax evaders, only results cases that are pushed into the future as these individuals are allowed to walk. The excuse here is that the judiciary is too overburdened to deal with these cases effectively and promptly. I am afraid that unless this government or any government deals with that aspect of the broken system, any reforms will never be implemented. To have any chance of success, let alone any chance to reach a climate for economic growth, there has to be a framework for enforcing contracts that is recognized and respected by all by imposing stiff penalties to all those who violate their side of the contract, whether public officials involved in corruption cases or entrepreneurs not returning the sums of VAT that they have collected on behalf of the government.One may counter, that Greece was growing until 2008 at reasonably healthy rates with the same judiciary and the same lack of contract enforceability system. Yet, even though we all recognize the reasons behind this consumption led growth engineered by easy credit, which led to the current crisis, it is the asymmetry between the upturn and downturn that obscured any need for reform. An expanding economic pie conferred benefits to all, even though these benefits also created “built in” destabilizers that now confront us all. I think, given the state of corruption as the result of lack of contract enforceability, the main reform that at this point that needs to take place, is the reform of the judiciary, for anything else to have any chance of success.

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