Greece's Problems Have Not Gone Away, Just the Headlines

Greece leaving the euro is old news. Since the former Greek Prime Minister, Alexis Tsipras, agreed to a third bailout in July, the perception of Grexit as an immediate threat has subsided – or at least disappeared from comments.

Nonetheless, while appetite for Grexit outdoors Greece has abated, the distressing seven months of wrangling over its bailout with Europe created a significant domestic demand for coming back to the national currency.

Polls suggest that a quarter of the electorate is likely to select Grexit-favouring parties including Popular Unity (the Syriza splinter group), Golden Dawn, and KKE (the communist celebration). While the allure is there, the Greek exit from the Eu is unmistakably a bad idea.

Drachma drama

Riding the influx of popular discontent galvanised by the No (OXI) campaign in the referendum more than Greece’s bailout, drachma advocates argue that trembling off the shackles of the euro will allow for an end to austerity and for nationwide self-determination. Echos of former Prime Minister, Andreas Papandreou –- who campaigned in 1981 for national independence, popular sovereignty, as well as social liberation – permeate a population oppressed by five years of economic dislocation.

However, how can a return to the national currency enable Greece to offer the dual aim of reviving its depressed economy and regaining sovereignty? Here, despite its face value appeal, the argument becomes less clear.

One of the key “advantages” of rejecting the bailout and leaving the euro is the chance of defaulting on Greece’s debt, broadly regarded as unmanageable and not sustainable. A claim is that a comprehensive fall behind on external debt will ease pressure on the government, which will then be able to recapitalise banks and inject liquidity into the economy via borrowing in the newly freed Bank associated with Greece (effectively printing money).

While everyone agrees (even Germany) that some type of debt relief is needed for Greece, defaulting leaves a great problem. Cancelling sovereign debt does not mean that the government and private events will not have ongoing payment responsibilities denominated in foreign currencies. Even scrapping all sovereign bonds, how will the government purchase goods and services from abroad? Having the Bank of Greece print money only works in an entirely closed economy.

As the actual Greek state lacks foreign currency reserves, it will need to prop up a new currency and the worth of the drachma would drop like a rock. There is no evidence of acceptance as payment abroad. Additionally, what about private parties who’ve external obligations? How will manufacturers buy materials (denominated in bucks or euros) with drachma which counter-parties are unlikely to accept?

The best way a new drachma could find its feet would be via loans in difficult currency, probably from the IMF. Consequently, German finance minister Wolfgang Schäuble’s plan for a temporary Grexit (with generous support) is a better prospect compared to any unilateral exit plan. The path to the drachma with Relief assistance and some support for that re-introduced currency (a la Schäuble) would help ameliorate some of the dangers of Grexit.

Otherwise, the post-euro Greek finance minister could be begging for loans soon after defaulting on external obligations. Oh, and let us not forget that while this would all be happening, the value of deposits in Greek banking institutions would be massively reduced in tangible terms through the re-denomination to drachma.

Attempting in order to overturn austerity

Austerity is the other big issue for Grexit advocates. They reason that leaving the euro would allow for a more “progressive” development plan that is not dependent on the slashes needed to balance Greece’s fiscal deficit. The plan relies on changing foreign imports with domestic manufacturing. In addition, in a way, this would be the inevitable result of a return to the drachma. As imports will soar within price and trade systems will be disrupted, native reduced skill manufacturing may substitute some imports.

However, this would be limited to low-skill, low-value production. High-tech, high-value, complex manufacturing relies on substantial capital investment that no private party would be willing to supply to Greek firms in the medium term. The government will not be able to finance the proclaimed large investment projects for the same lack of capital explained over. Therefore, the conclusion is this: Indeed, there is capacity in Greece for industrial development and domestic production. However, this occurs at the bottom end of the production level and it will generate employment and wages worse compared to Bulgarian standards.

There is opportunity for development in the Greek economy and large opportunity for improvements in efficiency. Nonetheless, all of these are dependant on developing and liberalising the private sector.

If the basis for a drachma development plan’s on state spending ultimately, unchecked monetary expansion may lead to runaway inflation. A South Korea-style national industrialisation plan is difficult in 21st-century Greece.

The sad summary is this: a return to the nationwide currency could lead to growth ultimately, but it will entail a severe drop in living standards, financial dislocation unlike anything experienced to date and (most probably) high levels of borrowing at disadvantageous rates. If, accepting these constraints, the actual Greeks want to choose the “freedom” of the drachma; they are entitled to do so. However, a return to the national currency seems less a solution and more a Chimera.

Why leaving the euro has returned on the agenda in the Ancient greek election is republished with permission from The Conversation