…[O]ur distress comes from no failure of substance. We are stricken by no plague of locusts…[Our troubles come from] practices of the unscrupulous money changers [that] stand indicted in the court of public opinion, rejected by the hearts and minds of men. Franklin Delano Roosevelt, first inaugural address, March 1933
In 1933 with one of every four workers unemployed, the new president of the United States told a despairing public in his first address, “the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance”. Almost every commentator would tell us that for Greece today this sentiment would be the ultimate Pollyannaism.
Would it? If hope is an illusion, when the 17 June election results come in, the outcome will bring nothing more than a different route to misery. A government of the Right would mean more and deeper austerity to hold to the euro, while victory for the Left would bring disaster through estrangement from creditors. Misery or catastrophe. Not a happy choice. It serves the interests of European financial capital and the big exporters in Germany to convince the Greek electorate that these are the choices, the TINA (There-is-no-alternative) principle on steroids. But aren’t they right? After all, Greece does not have a currency of its own. This means that should any Greek government displease the lords and ladies of the EC and the IMF, disaster would result. The offending Greek government would discover that it could not borrow from anyone, and would receive no “aid” from Brussels. The public sector could not pay its bills, not even its employees, and chaos would result. Should the feckless Greek government jump into the drachma, the lack of foreign exchange reserves would provoke a devaluation process generating hyperinflation.
“No way out”. The Greek population must shun the siren calls of the Left and suffer dutifully under a gathering weight of austerity under the misleadership of the same gang that brought on this mess… Actually, no. There is an alternative if the Greek people exchange fear for hope as Roosevelt suggested to Americans almost eighty years ago. Let us look at the practical possibilities if we tentatively embrace hope. We can first consider the apparently irrefutable argument that if a Greek government refused to accept Troika terms (EC, IMF and Berlin), “it could not pay its bills”. The Greek public sector deficit is about nine percent of GDP, which is approximately 22 billion euro. Over half of that 22 billion is interest on the public debt held by private institutions (banks in and outside of Greece).
A temporary suspension of debt payments would reduce the deficit to slightly less than ten billion euro. This, the “primary deficit” in public finance jargon, is not high by international comparison. If Greece had its own currency, the government could borrow the ten billion from its national central bank, a process known as “monetizing the deficit”, and closely akin to the “quantitative easing” practiced so liberally by the US Federal Reserve, the Bank of England and the European Central Bank itself.
Greece does not have a national currency, eliminating direct monetization. Instead, the new government would implement monetization of the deficit via the back door (so to speak). This would be done in two steps, first, nationalize the major banks incorporated in Greece and appoint new directors and CEOs. Second, the nationalized banks would create public sector checking accounts of ten billion euro at an interest rate equal to the ECB bank rate (about one percent). The government would pay that four percent of GDP with the borrowed funds, including salaries to its employees. Note that the government would pay its bills in Euros, as before.
We can review the possible objections to the feasibility of this form of deficit finance. First, any objections based on sanctions by the Troika are irrelevant. For better or for worse, the debt moratorium would mean that a sharp and irreversible break had been made with the overlords and overladies in Brussels, Berlin and Washington. Second, counter arguments based on insolvency of the nationalized banks are also irrelevant. The de facto bond sale between the public sector and the government owned banks need satisfy no solvency conditions. The banks can literally create money from whatever assets they wish (or from none) and denominate them in Euros (which is the national currency, after all).
Third, might there be a problem with insufficient cash, because the banks can create euro credit but cannot print euro notes. If a problem at all, this would be a minor one, because in a modern economy only a small portion of transactions are in cash. In a few limited ways defaulting with the euro has advantages over default in a country with its own currency, albeit it fleeting. For example, since every euro looks alike, the government could write checks to import desperately needed medical supplies for hospitals with no fear of a currency conversion problem.
The hopeful scenario begins with a simple step: covering the public deficit with bank borrowing. The borrowing could not occur previously because the Troika rules did not allow it. Add a publicly controlled bank to abandoning the rules, and it really is that simple. Then, the difficult part begins, recovering from the ravages of two years of draconian austerity. Suspending debt payments and borrowing would provide at best a brief moment for the new government to act purposefully. Into that brief moment the government would squeeze a transformational agenda to make Roosevelt’s first 100 days (the origin of that journalistic cliché) seem slowly-paced.
First among these might be a comprehensive fiscal reform, designed to make the rich in Greece pay tax. That will easily eliminate the fiscal deficit. An important part would be shifting from the regressive indirect taxes championed by the European Commission (VAT) to direct taxes on household and corporate incomes. Simultaneously, the government might create a “shadow drachma”, with a plan to exit the euro in the manner that it joined it (“get out of a blind alley the way you went in”, Jesse Jackson famously advised). Essential and of great immediacy would be transitory import controls and export subsidies to narrow the trade gap rapidly. All of these, plus additional measures such as financial market interventions, would be in flagrant violation of EU rules. But, the EU rules are irrelevant when you are out. As there are countries that use the US dollar without being part of the United States, Greece would de facto become a non-EU country using the euro (at least during a transitionary period).
The hopeful path offered to Greek voters on 17 June will be fraught with difficulties and challenges. There can be no doubt that a government of hope and action will make its share of mistakes. With those likely mistakes in mind, I end as I began, with a quotation from Franklin Roosevelt, from his address to the Democratic Party’s nominating convention almost exactly 76 years ago:
Better the occasional faults of a government that lives in a spirit of charity than the consistent omissions of a government frozen in the ice of its own indifference.
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