One of the things that has been intriguing about the handwringing among European policy-makers has been the general refusal to consider the idea that one of the countries being wrung dry by doomed-to-fail austerity programs might just pack up and quit the Eurozone. The assumptions have been three fold. One is a knee-jerk assumption that the costs of exiting are prohibitive (this argument comes from Serious Economists in Europe, but they never compare it to the hard costs of austerity and the less readily measured but no less real cost of loss of sovereignity). Second is that an exit would come via a country being expelled, since the Eurozone treaties prohibit unilateral departure. Third is that it would be too much of an operational mess to revive a defunct currency.
A very good piece by Floyd Norris in the New York Times fills this gap by describing that Greece has the motivation and the means to leave. He points out that the treaty arrangements are pretty meaningless: no one is going to send troops in to Greece to force compliance.
He also dismisses the notion that going back to the drachma would be insurmountably difficult. The model is Argentina going off its dollar peg. Set a value of the drachma v. the euro and convert existing debt at that rate. Per Norris:
In early 2002, a new Argentine government ended the peg and did much more. It defaulted, and it required its citizens to do the same. If you had a dollar deposit in an Argentine bank, it became a peso deposit, soon to be worth about 30 United States cents to the peso. That was true regardless of who owned the bank. If you wanted to get dollars back from your Citibank deposit in Buenos Aires, you were out of luck.
Argentina was cut off from international credit. Imports plunged and the country entered a deep — but relatively brief — recession. The peso lost two-thirds of its value within a few months. Argentina was sued by everyone in sight.
But devaluation worked, as it often does. Argentine exports became competitive thanks to lower costs, and the economy rebounded. There are international judgments still outstanding against the country, but when it comes to sovereign states it can be easier to get judgments than to collect on them. Diplomatic assets are off limits — no one can grab the Argentine Embassy in Washington — and monetary assets can be kept with the Bank for International Settlements in Switzerland, which will not allow them to be seized.
In fact, Argentina has since had the best growth among Latin American countries and has shown improvement on social indicators. And remember, Iceland’s central bank collapsed and it was similarly cut off from foreign capital. The first six months after the failure were chaotic, but the Iceland economy has rebounded nicely while Europe is mired in flagging growth.
But he dismisses concerns about violating private bond agreements with a currency change. Most are subject to Greek law, and suitable legislation would presumably be passed. While bondholders of bonds issued under English law could sue, good luck on collecting.
The biggest operational challenge Norris anticipates would be how to print enough currency in secret, since a move like this would need to be announced over a weekend. And word getting out would precipitate a run on Greek banks. Perhaps the Greeks would need to declare bank holiday to buy more time. He also bizarrely says the Greek government would need to balance its budget. Huh? The big risk is that Greece prints rather than getting its tax collection and bloated civil service under control and generates serious inflation.
The obvious question is that as much as this move might be painful and disruptive for Greece short term, it would be disastrous for the Eurozone. Greece has a credible threat it can use against escalating European demands for austerity. Even Angel Merkel has indicated that she understands that Greece being expelled from the Eurozone, meaning an orderly departure, would hurt Germany. A surprise exit would have all sorts of nasty knock-on effects.
So why hasn’t the Greek government done a better job of playing its cards? After all, the rising level of civil disobedience is reaching its endgame.
Unfortunately, the example of Ireland shows that it only takes a very few, in its case, one, critically placed quislings to sell out a country. The Irish government had not engaged in deficit spending; the problem was it had a boatload of bust banks. The Irish central bank had issued a guarantee of bank debt in 2008 which was a colossal mistake and experts argued could have been reversed. EU and ECB pressured the Irish government to keep the guarantees in place in order to get a rescue. But the Irish government could have stared down the Eurocrats; it didn’t need help immediately, and Portugal and Spain would go into crisis long before Ireland would. The finance minister (and the IMF actually supported the Irish position) wanted a bailout for the banks only. But the head of the central bank, Patrick Honohan, backed the ECB/EU position. And who is this Patrick Honohan? A man who led Ireland’s bank stress tests and declared losses to be manageable. Oh, and a member of the council of the European Central Bank, which meant he was playing a role opposite to that of representing the best interests of Ireland. We can see which one prevailed.
Right now, the Greek government seems to have bought the TARP sales pitch “capitulate to the banks or there will be armageddon” hook line and sinker and are knuckling under to ever more draconian demands. But unrest is rising and the parliamentary majority of the ruling coalition is only five seats. A few defections could change the dynamic substantially.
The point of the Norris article is not to say a Greek departure from the Euro is likely, but that it would be possible and in the long run might be a better outcome for the nation. And we learned in the crisis how things that seemed to be low probability were precisely what wound up taking place.