by Frank Schnittger
Sun Jun 28th, 2015 at 12:07:34 PM EST
Let us assume for the moment that the Greek people reject the Eurogroup ultimatum by an overwhelming margin and that the EU/Troika/Council/EuroGroup continue their childish stance of throwing sand in the face of Tsipras/Varoufakis every time they make a proposal. Let us further assume that despite running a structural primary surplus the Greek Government runs out cash in the near future: so much so that it has to default on its IMF loans and has difficulty paying wages, pensions and contractors.
This will be mainly because the current crisis has further depressed the economy and created a crisis of confidence which will result in the citizenry and businesses hoarding cash thereby depressing tax revenues further. Banks will also struggle for liquidity in the absence of further ELA assistance from the ECB. Thus, even though the state and the banks may still be technically solvent, liquidity will become a huge problem, the more so because the cash cow of the tourist industry appears to be in severe recession.
What will happen then?
The suggestion mooted here and elsewhere is that the Greek Government will start part-paying its staff, pensioners and contractors in Tax IOU's denominated in Euros (Eurious). Thus a contractor might be paid 60% in hard cash Euros, and 40% in Tax IOU's also denominated in Euros, but not trade-able internationally, because they will have been printed by the Greek Central bank without the approval of the ECB. This new "money" can be used to pay tax and perhaps certain utility, health and education bills on a basis pari passu with hard currency.
In fact this new currency will be a Euro in all but name, but not usable to pay for imports because it will not be accepted outside Greece. Of course traders inside Greece, who obtain many of their goods from abroad will not be very happy to accept payment in Eurious, and some will doubtless refuse to accept them. A grey market may well develop where Euro cash rich businesses (tourism sector) will trade Euros for Eurious and use the latter to settle their tax bills. Should a Euriou trade at say 80% of a Euro, tourism sector industries will be able to achieve an effective 20% reduction in their tax bill (thus largely offsetting the VAT tax hike which the Government may still have to impose to improve its liquidity and solvency).
Not everyone will be happy. A state employee paid 40% in Eurious who only pays tax at an effective rate of 20% will still have 20% of his salary in Eurious - perhaps more than he needs to pay his utility, health and education bills or on purely local produce. If he chooses to exchange this for Euros on the grey market, he will effectively be accepting a 20% cut on that part of his salary. A salary cut in all but name. However there is no reason why domestically produced Greek goods should cost any more in Eurious than in Euros and the state may well introduce laws requiring all or most traders to accept Eurious at face value. This would systematically discourage imports and promote indigenous produce.
The beauty of this solution is that at no stage does it require Greece to formally leave the Eurozone. The problem of liquidity will have been resolved, and an effective internal devaluation will have improved the competitive position of the Greek economy. (Exporters will of course continue to earn hard Euros as normal). The Eurozone countries will doubtless rage and call foul and seek to have Greece expelled for issuing "counterfeit" money. But in fact no counterfeit will have been issued - there is no pretense that the Euriou is identical to the Euro, and there is no mechanism for expelling Greece from the Eurozone. Many countries - Macedonia, Malta, Serbia, and Montenegro - do in practice accept Euros in parallel with their own currency even though they are not formally part of the Eurozone. (Euros are even widely accepted in parts of the UK - e.g. N. Ireland).
Assisted by this effective internal devaluation and freed from the immediate requirement to pay off IMF loans and introduce further grossly deflationary measures, confidence (and national pride) may soon return to Greece. The structural primary surplus may soon assert itself (as the economy recovers from the immediate crisis) leading the Government to a position where it can start winding down the creation of new Eurious and perhaps wipe them out altogether by exchanging them for hard euros.
Of course if the ECB simply did its job as a central bank, lender of last resort and guardian of the payments system, there would be no need for Greece to introduce a parallel currency to maintain liquidity. In theory, even the threat of such a parallel currency should bring the ECB to its senses and encourage it to perform its duties correctly. But this is the ECB we are talking about - not even the worst of the EU institutions - but in dereliction of its duties nevertheless.
Meanwhile the Eurogroup leaders will be standing by impotently but absolutely seething with rage. Their bluff, bullying and blundering will have been called for what it truly is. All sorts of "sanctions" against Greece will have been mooted and threatened, and perhaps some even implemented with or without legal sanction. But so long as the Greek Government can pay its way, they will be powerless over it. At some stage, seeing that they risk a total loss of their Greek "assets", they may agree a debt restructuring and come to a deal to "normalize" the situation. But they will then be doing so on more equal terms with Greece.
Not only will the Austerians (the promoters of austerity) be revealed for the anti-scientific, sadistic and economic illiterates that they are, but the neo-liberal fever that has griped Europe will have been broken. New parties like Podemos and Syriza will ensure that a generational shift in European political leadership happens sooner rather than later. An Taoiseach Enda Kenny and Michael Noonan had better call an election before the Greek economic recovery becomes evident, or else they too will reap the whirlwind.
Once again, we will all be in debt to Greek democracy.
[PS I have made a few minor amendments to the above to make it more suitable for submission as an opinion piece to Irish papers]