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To Drachma or Not to Drachma?

Dr Spyros Economides, a political scientist at the London School of Economics, suggested that f Greece leaves the Eurozone, it would be a disaster. He goes on to say, “some economists argue that having the drachma back, would allow Greece to be more competitive internationally. In economic, theoretical terms, that’s all well and good, but I do not know what they produce to allow that ? What can we say that Greece produces  or exports that allows it to be more competitive?”

 

It seems like the directive the Greek government is trying to follow is to remain in the Euro zone. It is clear from the new prime minister’s choice of words that, indeed, that maybe the plan. While a member of the Euro Zone, Greece will have to follow a structured austerity plan, designed for it to meet the requirements and start paying its debt.  But, with inflation soaring, there is a chance of further social and political turmoil.

 

Taking a closer look to the possibility of Greece going back to the drachma, with the right planning and a “reborn” drachma, there may be a chance the economy in Greece may make it after all. Here is what I mean by that: Should  the government decide to exit the Euro Zone, its creditors and “powers to be” will have no place in directing the government when and how to spend. Even though history suggests otherwise(Argentina among other prime examples), and provided that they avoid a disaster in policies, stability would eventually return. The drachma will find an equilibrium, thus inflation should decline.

 

Greece will also probably attempt revive its two major areas of concern: agriculture and tourism. Introducing the drachma(or a different currenty) and obviously the fact that for the next 5 years the drachma will be a devaluated currency, will attract more tourists. I remember when I was a student, all I needed for the entire summer were $600 in my pocket, which made it more than enough for me to tour the islands of my choice and pretty much endulge my summers’ in Greece.  Tourists will bring their euros and dollars to Greece and get as much as they can for as little out-of-pocket expenses. There are going to be no structural reforms, per se, no bail-outs, nor loan trenches, nor  lectures on spending cuts or shavings. Make no mistake about it; it is going to be a painful process and it will require a lot more sacrifice(a word that has become an anathema of the sort). It is not going to be quick fix but, it will certainly attract outside investors simply because of a devaluated currency allowing them to invest less to gain more.  A temporary devaluated currency will certainly make Greek exports more competitive.

 

Now, should Greece decide to stick around the Euro Zone, restructuring the debt it has already incurred should not take people by surprise.  The fact of the matter is when Greece entered the European Monetary Union,  the drachma ceased to exist, legally. Leaving the Euro Zone will result to Greece coming to means on a different, new currency thus starting from scratch. And should Greece decide to re invent the wheel, leaving the European Monetary Union may mean that the cost of borrowing will be higher than if they stayed within the Union. The fact of the matter is only a handful of investors will lend to a government that has restructured a debt, let alone a government that decided to make up its own currency.  If my memory serves me well, once a country was close to entering the Union,  borrowing costs declined thus allowing the future member country to breath a sigh of relief on currency devaluation.  This process will be reversed for a country deciding to leave. That may mean financial chaos within the private sector; in simple terms, all private businesses that have borrowed in the past, will have to keep on repaying their loans in euro and not in the currency they are currently operating on. This will trigger a domino effect because of their obligation to pay up in full or in default. Furthermore, their balance sheets will be totally distorted and obviously the balance sheets of the banks they borrowed from will be distorted too, resulting to devaluations of almost everything that can be considered liquid.  As attractive as it may sound for Greece to leave the European Monetary Union, should they do that, it is my personal opinion that it may cause a very big mess in the banking world. They will be “hit” and left with loans businesses in the private sector cannot pay anymore, due to the devaluation of the currency against the Euro.  France and Germany, being the two countries exposed the most (with the Dutch not too much of a distant third) with the debt, could be forced to bail out their banks, again. Should Greece leave, borrowing money will be a dream, at best, for the next ten years. And, with that, they can kiss goodbye to them investing in its industry; Greece has not invested in its own industry for a while. A former maritime power, agricultural and tourism giant MUST invest in order to achieve any progress. There have been no signs of export in a while and its capacity for tourism at this point is limited.

 

The fact of the matter remains that having lost its financial sovereignty to the Troika(European Union, The International Monetary Fund and the European Central Bank) has left a bitter taste to the mouths of all Greek citizens, including those expatriated. However, being in the precarious situation that it is in, Greece must remain in the Euro Zone because the government will be forced(as well as its citizens)for once to put a structure in a system that has been known to be a faulty one. A system where a publicly elected servant, has tasted power and has abused it in return rather than using it to the best of their ability to assist those who trusted them with their vote. It is about time someone changed that mentality. And leaving the Euro Zone will be the quick fix, a road most Greeks prefer because it is a quick fix. Rest assured that using the road less traveled, has put Greece where it is right now.

 

In my opinion, it will be a total disaster if Greece left the Euro Zone.  It will prove not only difficult but it will erase any little amount of credibility Greece has been left  with. Pride is no longer an asset but a deficit. Business minds and cool heads need to prevail in order for structure to occur and the country to breathe again. Make no mistake about it though; we must think as Europeans and not as Greeks.

 

This article has been published by Dr. Efthymiopoulos on Strategy International’s site (http://www.strategyinternational.org/index.php/sectors/goeconomicsgeopoliticsgeography/74-economics/272-to-drachma-or-not-to-drachma-).

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