Greece’s ruling political party, Syriza, is experiencing an unexpectedly inflexible response from the Troika—European Union, International Monetary Fund, European Central Bank—concerning partial forgiveness of its outstanding debts, prompting questions about whether it’s in the country’s best interests to exit the Euro, and the European Union as a whole. If so, then what?
The temporary extension of the previous agreement with no concessions suggests that Syriza was too optimistic about the chances of a deal that was acceptable to its supporters. Their problem is that an acceptance of the Troika’s hard line will almost certainly mean a total loss of credibility in the eyes of their supporters back home and the beginning of the end for the party.
The only credible alternative is an exit from the Euro. While their official party line is that they wish to remain in the Eurozone (although members are split on this question), their leaders must realize that under the new circumstances, an exit is the only realistic alternative if they are to survive as a political party. If the Troika refuses any substantive concessions, which seems most likely, then Syriza will acquire increased sympathy for an exit from the Euro, and can argue that the “new situation” demands it. What would an exit mean for Greece?
In the short run, such an exit will trigger a state bankruptcy with substantial losses to Greek’s creditors, thus validating economist Michael Hudson’s oft-repeated warning to the creditors of this world that “Debts that cannot be paid will not be paid.” It will also mean a substantial devaluation of the New Drachma, which in the least will enable Greece to become internationally competitive once again. However, if they do nothing more than leave the Eurozone, then I fear that their troubles will continue unabated, as their destiny will continue to be determined by outside forces. In other words, leaving the Euro is not enough. If they truly want to be in control of their own destiny and their own economy, they must, in my opinion, take two further steps.
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The first is to apply capital controls on flows into and out of Greece, a right that is clearly stated in IMF Article VI. Ideally, Syriza should have done this immediately upon taking power—particularly on capital outflows—but they probably wished to avoid provoking the EU, whose rules force member states to give up this fundamental right. Nevertheless, upon exiting the Euro, Syriza should apply capital controls immediately, whatever the consequences. In a worse case scenario, this could make an exit from the EU necessary, unless the EU is willing to make an exception for an indefinite period (which would be quite reasonable under the circumstances).
The second vital step is to leave the World Trade Organization. Without this step, Greece will have great difficulty rebuilding its economy. It is essential for Greece to take control over what products are allowed into the country while its domestic companies become more competitive. In a word—protectionism; the only strategy that has ever worked in transforming an underdeveloped economy into a competitive industrial economy. Every single industrial nation followed this strategy, starting with Great Britain in the 18th century, followed by the USA in the 19th, followed by Japan and the “Asian Tigers” after WW2, followed by China most recently. There are no exceptions to this rule, no matter what you may hear about the virtues of “free markets” from those who have made the shift. And, of course, the WTO, designed to meet the wishes of the largest multinationals, does not allow this. In the rebuilding phase, Greece should follow the following rules, and not fall back into past patterns:
- They will have to reorganize their economy, starting by producing their own essential goods (creating many new jobs), and exporting only to the degree that is necessary for importing essentials that they cannot produce themselves.
- They must start collecting taxes effectively. The New Drachma’s currency regime should be a “managed float”. They must adopt a policy of NO MORE FOREIGN LOANS, except where specific new export income can validate and pay off the loans in a limited time frame, and NO MORE PRIVATIZATION of public assets.
- They must unilaterally decide which foreign companies and products will be allowed into Greece and which foreign investment is in keeping with their domestic priorities. These policies will require new trade patterns with a few selected partners on a quid pro quo basis. They will meet resistance from some quarters, but acceptance from others. It is quite doable. Not only that, it will be an enjoyable time as national pride and solidarity and self-determination rule the day.
Eventually, after some years, Greece may be ready to rejoin the EU, but not the Euro. I have stated before 1 that the only viable long-term solution for the Eurozone is a bifurcation into two groups: those who leave the Euro and reestablish their own currencies, and the remainder who form a new Eurostate with a single currency and government. Until that happens, the EU will be in constant crisis and may even end with a crash [as evidenced by what is happening now in Greece?]. With the bifurcation, the EU could continue to be a major political and economic force with a viable internal market.