With rumors that Greece might leave the Eurozone circulating, I would like to gain the perspective of the Mises community on this issue. On one hand, the existence of the Euro seperates the creation of money from the national government and thus places a cap on how much the states in the Eurozone can spend (as we’ve seen with the Greek austerity measures). On the other hand, the Euro is still fundamentally a fiat currency and is thus still vulnerable to all of the political pressures of national currency but with less accountability since the Euro is controlled by continental leaders rather than national leaders. Which argument do you think is more sound and why?
The latter seems right to me. We have seen, and will see further, that the Greek austerity measures are one huge farce.
What I think is happening: The Greeks want their free lunch. The politicians are scared to refuse them. They are desparate because nobody is willing to give them money anymore, not the banks [because they know they won’t get repaid] and not the Germans [because printing Euros to feed all those Greek mouths means the Germans will have inflation, something that they are terrified of ever since Weimar].
So those wily Greeks found a can’t-lose strategy. They threaten to go back to the drachma. If the Eurocrats, interested in preserving the Euro for reasons of their own, panic and say “Here, take all our money, please, just don’t leave,” the Greeks win.
If, on the other hand, the Greeks get told, “Go ahead, leave. Don’t bang the door on your way out,” they also win. Because now that their money is drachmas, not Euros, they can legally print as much as they want, use it to pay off all their oustanding debt, pay their own salaries, benefit the people, everythings fine. Like all politicians, they ignore the long term harm money printing has.
My guess? Expect the spineless to give in, meaning Greece stays and gets its free money from Germany. Merkel et al will hope to scare the Germans into submission, with horror stories about the end of the Euro meaning the end of Western Civilization.
Ding ding ding we got it. I hate to talk about the Euro as a ‘‘conspiracy to have control over europe with the euro dollar’’, but sometime it sounds like it. Your last sentence is 100% accurate. More trouble for any country of the euro and they will talk of the end of europe or some doomsday scenario.
The Leninists didn’t build the European Union to let some whiny Germans get in the way of one world state.
I think you are all overstating Germany’s position inside the EU. Yes, Germany is the economic powerhouse, yes, Germany is the most popolous country, yes, ordinary Germans are against the euro and handouts. But Germany also has the weakest political class in the whole of Europe, bred and trained to be subservient and completely ineffective as far as defending national interests goes. The present German politicians will pay lip service to the people (“Stop bailing out Greece!”) but won’t do jack about it. In this climate we may argue that, perhaps, a euro-skeptic party will pop up, like recently happened in Finland, but the problem is the German political and judicial system, an inheritance of Roosevelt’s and Churchill’s fatal error of allowing defeated France to sit at the peace table as a winner. The last vestige of German autonomy was the Bundesbank: not only it was destroyed with the birth of the ECB, but its influence has been steadily erased.
I have already stated the true power in Europe lay in Paris. We all know France is a curious (and not very healthy) admixture of old fashioned Jingoism and Elegant Leftism (or as the more savvy Frenchmen call it Champagne Socialisme). Also the political culture in France has still haven’t gotten over their crushing defeat in WWII and the loss of their colonial empire in the '50s. Their leadership wants to rule as much of the world as possible and cannot accept the fact they’ve become a second tier country, beaten by the US in the military/imperial sector and Germany and China in the economic one.
Having said that right now France is firmly in charge and won’t allow a single country to default on its debt or leave the euro, no matter the cost. That would be a sign of weakness. That would mean their empire is crumbling again. And, happily for them, this time they can share the burden by presenting the bill to everyone from Capo Finisterre to Katowice. Right now there’s no resistance: German demand to increase interest rates have been met with a measly quarter of a point increase which is failing to do one ounce of good and is in fact squandering precious time to defuse the price inflation timebomb. German requests to have a German or a Dutch in charge of the ECB have been shelved as soon as they were presented: Trichet’s heir will probably be an Italian.
While I still agree with Soros and Celente the EU and the EMU in their present form have less than a decade to live, I am having doubts about how this will come into be. Germany may be an economic powerhouse but it’s a political dwarf. Their leadership will rubberstamp everything originating from Paris. The most plausible scenario right now is the debt crisis will keep on aggravating. Spain and Italy are always courting with insolvency. But don’t expect countries like Portugal and Greece to improve. France will keep on pushing for “aid packages”, all the while imposing “austerity measures” to show these aren’t just handouts. And it will be these austerity measures that will make the game simply not worth anymore for the PIIGS. Right now the EU has been a sort of Santa Claus on a huge scale: have you ever wondered why everybody (except for that thick-headed Swiss) wants to hop aboard? But the moment the benefits will be outweighed by demands for “austerity”, expect many to reconsider their enthusiasm.
First things first: there is no problem in letting default for the Eurozone. The euro would not be impaired by defaulting. So all this “the bailout was necessary to save the euro” is BS, even if we take saving the euro as a worthwhile goal.
And if the bailout is not for saving the euro, what is it for? To save the Western European banks which have invested in Greek bonds and would be put in a very tight spot if all that money puffed away. And if saving their own banks is the goal, letting of the hook with the old drachma is nonsense. So NO, they will not let get away.
Second, if was the only bad boy, perhaps kicking it out would make sense, if the EU preemptively bought all if its outstanding debt to European banks. But with half the eurozone waiting in line for a bailout, worrying about is foolish. Heck, only the and seem to have e few decades before going bust, all the other guys are toast.
Third, CANNOT go back to its own currency. The regression theorem is clear here: what has not been money for years cannot become money with the stroke of a pen. Any new drachma would have to be pegged 1:1 to the euro for years to even be accepted as money, and that would defeat the purpose of a new currency. At most, could be allowed to print ‘its’ euros, different form those of the eurozone.
All in all, this is idle talk. ’s fate will be that of the eurozone. If you want a country that will be leaving the eurozone, look for and the not .
Fascinating insights, guys.
Merlin, I’m thinking the Grreks might say “Who cares about the regression theorem. Sure we’ll start the first day at 1 to 1 with the Euro, but we are not letting that stop us print money to pay our debts. That’s the first order of business,”
Afterwards, if/when the drachma takes a dive, they can blame speculators, like always.
Kakugo, I believe your suspicions regarding the French connection to all this may be quite accurate. From EPJ:
"French President Nicolas Sarkozy threw his weight behind Mario Draghi’s candidacy to head the European Central Bank on Tuesday, reports Reuters.
Draghi, the current head of Italy’s central bank, is a former vice chairman and managing director of Goldman Sachs International."
The greeks can issue their own currency pegged at whatever value they chose then float it so that it rapidly devalues.There is nothing to compel them to link it to the Euro
Hold on a second.
Even if Greece goes back to drachma, it will still have to repay in Euros. If the Greeks start rapidly printing the drachma, currency markets might start pushing the exchange rate down, and then their debt burden will remain as high as it was.
At the root of these scenarios is the age-old question with regards to money printed out of thin air: Who pays the piper – the banks (now holding Greek debt) or everyone else? The clear answer is age-old, as well. The elites will bail out the former (i.e. themselves) by making the latter pay through inflation. The driving dichotomy is not national and the political/national posturing is nothing more than a distraction.
Prateek,
I think the Greeks are one step ahead of the currency markets. Here’s how it plays out:
Greeks declare drachma the new currency. They call up all their debtors at the same time. Yes, they may need 5 or 6 telephones and secretaries, but they’ll manage somehow.
“Hello, Bank of Whatever? This is the Greek govt. We have your electronic money right here in front of us. Would you prefer payent in Euros or Drachma?”
“Euros, which you may purchase from us at the rate of 1 Euro = X Drachma.” [X can be any number at all].
“OK, let me press the right button here. Done. We have electronically transferred the required sum into your electronic account. Tata.”
After a while the drachma drops, due to greedy speculators, as the govt explains.
“Euros, which you may purchase from us at the rate of 1 Euro = X Drachma.” [X can be any number at all].
What if managers of the Bank of Whatever can see behind this, and request some tangible resources instead of Drachmas? Or is this a bank run, where creditors choose between being paid in bad money or not being paid at all?
The debt is owed in Euros and will have to be paid back in Euros
Guys, you can’t make money anew out of thin air. How many ‘bancors’ would bread cost if I declare tomorrow that bancor are the new legal tender? No new currency in history has ever been enacted without being pegged to existing currencies for some time. The euro itself necessitated a decade of managed exchange rates and years of hard pegs to work. cannot introduce the drachma: no one would take it, it would be like decreeing all civil sector wages to be zero. Again, at most they can print their own euros, as notes and coins are already distinguishable by country.
Andris,
Then the Greeks will fill the media with how unfair it is, and that they are left no choice but to default.
Merlin,
The Euro people cared about their money, and so were carefull to give it respectability, as you said. The Greek politicians have more pressing problems, like austerity and riots, for which they are seen as directly responsible.
What do the Greeks care about keeping their money pegged? They start at 1:1, print to pay their debts, and let it drop to zero for all they care. Then with their debts paid, they declare the New Drachma, equal to 10,000,000 old ones.
Beauty of the scheme: They Greek politicians can blame the greedy speculators and Eurocrats for the collapse of the Drachma. “It was their revenge because we defied them and refused to be their slaves. Look what they did to you, fellow Greeks. See how right we were cutting our ties with them.”
An example of someone doing exactly that in the past:
The Greeks have already eaten what has been lent to them. Everybody and their aunts know that that “investment” is a total loss and will not be recovered. The question is only who will take the loss, and by “who” I don’t mean which “nations”. Better yet, the question is how to make the usual suckers (i.e. everyone but the banks+elite cartel) take/accept that loss. Unification of fiat currencies (Euro, bancor, world currency) merely maximizes the size of the sucker pool thus spreading the loss wider (i.e. allowing for ever larger fleecings to go unnoticed). The more the world changes the more it stays the same.
OK, let’s say you boss comes in tomorrow and says: ”I’m paying you , what, 3000 bucks a month? Fine, now I made these pieces of paper I call ‘leks’ and I solemnly declare them to be pegged 1:1 to dollars. Here take your 3000 leks now. I’ll redeem them for dollars on a one-to-one basis whenever you like”. You take them and redeem right away. Next month, after you take your leks you boss says: “Redemption is ended, the lek is now free floating!” You quit because you’re not getting paid.
This is why Greece cannot go on with drachmas. Its not about what debtors are willing to accept (the alternative is total default, with drachmas at least they can wipe themselves), its about internal use: the economy wouldn’t work on drachmas and any attempt to pay civil servants would escalate in civil war. So, it’s out of the question and if Greece really tries it, it’ll be back begging for euros before you know it. But at leats they’d leave southern Albania alone
Smiling Dave
Then let the Greek government default, if it wants it so bad.
Then we’ll see when anyone will start lending to them again. And I think we are overestimating how much financies care about what the media thinks of them.
Merlin,
I agree that the results for the internal economy will be exactly as you say, hyperinflation. But when have the citizenry ever rioted about that? They see inflation and hyperinflation as caused by mysterious forces over which no one has control, or at best believe the old “speculators did it” line.
And of course, they politicians will make good and sure to pay the army and police first, link their pay to some inflation index, in short, keep them better off than everyone else, so that they will be willing to bash heads if needed. But it won’t be needed. There may be riots and looting, but not directed against the politicians. They are the good guys, loyal patriots defiantly opposing the evil speculators and Eurocrats.
Bottom line: Disaster cannot be averted by going back to the drachma, but that is not what matters to the decision makers. Blame can be shifted, which is what really matters to them.
Prateek,
For some reason not clear to me, govts dont like to default. They prefer to inflate. Probably has something to do with looking as if they are OK. Many an economist shows up on TV and says the US will never default, because unlike Greece we have a printing press. No hint of anything evil about printing yourself out of debt. Very respectable.
I agree that financiers may not care about the media. But politicians live and die by the media, not by the truth. And guess who has to deal with the rioting, the hatred of austerity, and wants control over the money printing?