THE ONLY WAY OUT FOR GREECE - Cutting the Gordian Knot
Germany’s single-minded insistence on exports as the engine for growth reminds me of the Midas myth: Midas, having been granted by Dionysius the gift to turn everything he touched to gold, came to regret it when he faced starvation and the loss of his daughter as a consequence of the ineluctable application of his newfound power.
German unyielding determination to achieve exports surpluses within the eurozone has much the same effect. Exquisitely efficient German industry with the Midas touch sells goods and services to Mediterranean Europe, where it then ploughs the resulting profits in the form of loans to enable southern Europe to buy more German exports. This circular process works until their customers become overloaded with debt and, like Midas’ daughter, expire, while German lenders suffer the hunger pangs of default. Greece is the poster child for this outcome.
Were it not tied to the euro, the Greeks would avail themselves of the corrective mechanism of the international marketplace whereby the drachma would lose its value relative to the euro, providing Germans with compelling incentives to buy more Greek exports and assets, such as tourism, exportable goods and services, real estate and both direct and portfolio investment in Greek means of production. (It makes no sense for Germany to trade useful goods and services for paper in perpetuity; at some point they must realize the value of their paper by reversing the process, cashing in paper for useful goods and services, else what’s the good of having paper?) The “invisible hand,” having righted the imbalance of trade, would obviate the need for Greeks to borrow to cover trade deficits. As it is, clinging to the eurozone, Greece cannot resort to devaluation and is thus stuck with the burden of crushing foreign debt, partial abdication of sovereignty to its creditors, and social turmoil.
Facing financial chaos, economic entropy and popular discontent, Tsipras may be resorting to desperate, yet sensible, even shrewd, measures: take the latest tranche of money to keep Greek banks afloat and buy time to implement as much of needed reforms as the Greeks can bear, then default, exit the eurozone, resuscitate the drachma and at a low value relative to foreign currencies and export its way out of the present economic straits. Were Greece to do so, overnight Greece would become a bargain for tourists and foreigners seeking to invest equity in Greek real estate, common stocks and direct investment. Prosperity, surging employment and restored social order would inevitably follow. Not for nothing the Chinese character for “crisis” is the combination of “danger” and “opportunity.”
To be sure, such a course of action means the Greeks will find themselves in reduced economic circumstances for an indeterminate period time, paying stiff prices for imported goods, renting housing from foreigners and working for foreign enterprise owners and tourists. However, the operative idea is that they will be working. Greeks will have to tighten their belts no matter what they do. There is no free lunch. If they attempt to appease their lenders with austerity as the price for remaining in the eurozone, as Athens has now acquiesced, Greeks will become debt slaves ad aeternum with dim prospects for economic growth, persistent high unemployment and social unrest.
Other European countries remain outside the eurozone without apparent ill effects. Why not Greece?
Given a Grexit, Germany, on the other hand, would face the prospect of defections from the eurozone by debt-laden Italy, Spain and Portugal — particularly after seeing the success of Greece in so doing. Such defections pose a threat to German exporters and lenders comfortably cocooned in the eurozone they desperately seek to preserve. On the other side of the coin, these defections would present a boon to German consumers and tourists in addition to Germans interested in investing in the defecting countries. Whether Germany would accept or resist euro-defections would depend on which of these constituencies exercise predominant power in Berlin. My guess is that the former, being better organized and influential, will prevail until they have no choice but to accept and refocus their attention in developing a more efficient, flexible system for cross-border transactions with non-eurozone Europeans.
Having come to regret his alchemical powers, Midas eventually begged Dionysius to reverse his “gift,” a plea the god duly answered, instructing Midas to wash in the river Pactolus. Thereafter whatever Midas put into the water would be reversed of the touch and the river sands turned into gold. Maybe a Deutsche dip in the Danube would be gut.