Ranking outcomes

Greece and the creditors are in last last-ditch negotiations where the creditors aim to keep Greece in the Eurozone and avert default. Greece aims to secure a bankruptcy deal that’s friendly to the poor and which makes growth possible. In subtext, the creditors want Greece to surrender unconditionally to the institutions to discourage similar movements elsewhere, while Greece aims for sovereignty to carry out a democratic mandate.

Recently it looks like a deal might be reached. Would that be a good outcome? I don’t think so. In my opinion the situation has deteriorated enough that walking away is better. Also we must not lose sight of better outcomes that are currently closed, opportunities that are squandered. To keep everything in context, here’s my ranking of possible outcomes from best to worst.

1. A better model for the Eurozone

The best possible outcome would be to change the architecture of the Eurozone to one that suits all economies. Currently the Euro is architected like the Deutschmark, a strong currency with very tight monetary policy similar to the gold standard and strict fiscal discipline. That has been a German political demand, but such an architecture doesn’t suit the UK (who opted out), Latin countries, and least of all weak undisciplined economies like Ireland and Greece. If the Euro were changed to be a weaker and more volatile currency like the dollar, and the ECB pursued loose monetary policy at times of trouble like the US Federal Reserve, weak economies would be better performing in general and would get out of crises easily. I’m not sure how a weak Euro would hurt Germany except psychologically.

2. A Europe with social transfers

The next best thing, if loose monetary policy and moderate inflation are out of the question, is a Europe with social transfers. A hard currency and strict fiscal discipline for governments, but a European safety net to bail out people (rather than governments) when times are bad. These would be things like EU-wide basic pensions, unemployment, and poverty line income support. Really basic stuff. Right now this is anathema in Europe, as relatively well off taxpayers in relatively prosperous economies resent paying social benefits to poorly off taxpayers in weak economies. But this is exactly the system in the United States. Individual US states and large cities routinely go bankrupt, but federal programs like food stamps and Medicaid support their poorest citizens. Is Europe really unwilling to offer the meagre social benefits that the US does?

3. Positive reform for Greece (a good deal)

After several years of deceit and mismanagement, Greek voters managed to fire the corrupt political dynasties that took turns in power and bring in outsiders (SYRIZA) intent on serious reform. Inexplicably, the creditors decided that they’d rather deal with the old guard that committed financial fraud at their expense and proceeded to undermine SYRIZA at every step. This is a squandered opportunity. For the first time in decades Greece has a morally sound government with a strong mandate and a credible agenda for reform. The same reform that Europe wants: Modern public administration, effective tax collection, making it easy to start a business. If the creditors would take Greece’s proposals seriously and engage in good faith, rapid progress would be made. Except success would look bad and Podemos in Spain would want the same.

4. Leaving the Euro and staying in the EU (no deal)

The best outcome currently open, in my view, is for Greece to walk away from negotiations and leave the Eurozone while staying in the EU. Dropping the Euro and introducing a national currency does two things: It lets the state create and circulate money in the domestic economy, and it makes imports expensive relative to domestic goods. For Greece that means the domestic economy will quickly return to health and poverty will be quickly alleviated. Food, housing, and services will be cheaper as they’re domestic. Technology imports and foreign services such as studying abroad will be expensive. The standard of living, which is mainly supported by domestic goods, will rise but Greece will feel a little backward for lack of imports. People will be able to consume more tomatoes and fewer iPhones. Greeks won’t like that because they love their iPhones, but right now tomatoes are more important.

Some common misconceptions about the impact of Greece leaving the Euro:

Greece’s debt is a separate matter from staying in the Euro. Greece owes more Euros than it can realistically pay, so in the end it’ll realistically pay less. If Greece stays in the Euro the creditors have more leverage to ruin Greece, making repayment harder. If it leaves, Greece has more prospects to recover and could decide to default with fewer consequences. Leaving the Euro is not the same thing as defaulting on debt.

In economic textbooks, leaving a currency union and devaluing is good for competitiveness. That works for an industrial economy whose output can scale a lot with small differences in producer prices. Greece produces olive oil and tourism. Tourism is price-sensitive, but it already faces strong market discipline and it’s not that scalable. If Greece drops the Euro it’ll become cheaper, it’ll sell a few more more holidays and foods, and overall it’ll make a bit less in Euros. The competitiveness argument is moot.

If Greece leaves the Euro the financial fallout will be small. The Anglo-Saxon investors already took their losses and generally acted businesslike in this drama. European governments bailed out their investors and are now holding the bulk of Greece’s debt. Because Greece’s economy imploded, this debt is worth less than face value. If Greece leaves European governments can realise this loss, they can continue to hide it, or they can reflate it with ECB money creation – the same choices they face now.

On the other hand if Greece leaves the political fallout will be large. Being in the EU or EEA but outside the Euro is increasingly looking like the better option. It’s where the UK, Denmark, Norway, and Iceland chose to be. If Greece makes the transition relatively painlessly other countries will sooner or later follow and the Euro will either unravel or lose many of its members and become a new Deutschmark for countries west of the Rhine. For Germany, this will be a large political failure.

5. Parallel currencies

Various technical proposals are being floated about Greece issuing some currency in addition to the Euro. The idea is you’d have Euros and Drachmas in your wallet and you could use either, but Drachmas would be easier to come by and worth less. These proposals aim to quit the Euro in substance while retaining it for morale, for appearances, or for the convenience of travellers. Most view them as temporary measures. Parallel currencies are a risky proposition. They work well at small scale. At large scale they’ve been tried by Latin American countries in crisis, with mixed and hard to disentangle results. Overall, depending on the technical details, parallel currencies work out about the same as leaving the Euro or significantly worse. They’re a great plaything for economists, though.

6. Continued austerity (a bad deal)

If Greece accepts the creditor’s demands it will be a bad outcome for all sides. The creditors insist on austerity and prioritising debt repayments over growth, as they have for the past five years. Continuing on this path will keep Greece impoverished and heavily indebted for the foreseeable future, and will bring further suffering and extremism. The creditors appear less concerned with fostering growth or ending the crisis, and more intent to prevent any country from going bankrupt in the Eurozone and then recovering. It’s Europe of debt servitude. The only good thing about this outcome is that it’s pacified. The empire wins, the rebels are crushed, and there’s an unhappy stability. Greece will still be broke and recurrent debt crisis will be the new normal.

7. Capital controls (like Cyprus)

One officially sponsored outcome that’s worse than austerity is what happened to Cyprus. people in Cyprus use a currency that’s called Euro and looks like the Euro, but a Euro in a Cypriot bank or in your pocket is worth less than a Euro in France or Germany because you can’t take it out of Cyprus. What happened to Cyprus is a remarkably cynical way to fracture a currency union and punish a state (for accepting the money of rich Russians) while claiming your shiny currency union is intact. After seeing the kindness of Europe, Cypriots probably wish they’d stayed a British possession.

8. Continued uncertainty

A marginally worse outcome is continuing the uncertainty that we’ve had since January. Since SYRIZA was elected, creditors have been refusing to roll over Greece’s debts and instead are asking Greece to pay them off as they come due. The ECB cut off one form of finance to Greek banks and is reviewing the other kind (ELA) on a regular basis, effectively inciting a bank run. It’s like the US Fed announcing that Michigan state banks could go belly-up any moment now. This strategy aims to damage Greece’s finances and banking system so that Greece will more easily pay its debts, presumably.

9. Leaving the EU

There’s much good in the EU besides an ill-conceived and damaging single currency system. For poor and troubled nations like Greece the EU brings stronger human rights, freedom to settle and work in any member state, and an open market which for ordinary people means freedom from profiteering of various sorts. The great achievement of the EU is that we can be in each other’s countries as citizens, not as barely tolerated guests. We put up with stupid bureaucratic rulings on bananas and cookies to retain this privilege. It is important not to throw the EU out with the Eurozone.

10. Political meltdown

The worst possible outcome for Greece is a disorderly collapse of SYRIZA and the rise of the nazi Golden Dawn party as “national savours”. Greece is closest to the abyss, but throughout Europe the social damage of the new order of austerity is fuelling far-right parties. In France, Le Pen is on the rise. In the UK, UKIP. It would be a sad legacy for Ms. Merkel, our de-facto European president to bring about the rise of fascism everywhere but in Germany.

As said, I think the best outcome currently within reach is number 4, leaving the Eurozone. Taking a bad deal, such as the creditors insist, is currently a worse outcome, and there are many worse ones. There are also better outcomes that would be possible. Currently, the three best outcomes for Europe are politically blocked by Germany.

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