There
is no shortage of viable plans for a departure from the eurozone or,
in some instances, the EU. All require a measure of fortitude and
adaptability–a willingness to step beyond what is, in fact, a very
uncomfortable comfort zone. The question is whether the Greek ethos
can rise to this challenge.
by
Michael Nevradakis
Part
2 - Existing plans for departure
Proposal
“A”: Perhaps the most well-known of these EU/eurozone departure
plans has been presented by British economist Roger Bootle, of
Capital Economics in London. The plan developed by Bootle and his
team, titled “Leaving the euro: A practical guide,” was awarded
the 2012 Wolfson Prize in Economics, the second most prestigious
prize in that field.
Bootle’s
plan calls for preparations for a eurozone exit to be undertaken
initially in secret and to be implemented swiftly. Debt would be
redenominated into the new currency and would fall under the
jurisdiction of domestic law. All bank deposits and loans would also
be redenominated into the new currency.
Capital
controls would be imposed to prevent capital flight resulting from a
possible initial panic or bank run. The transition period until the
new currency circulates would be mitigated by allowing continued use
of the euro and by promoting non-cash transactions. Devaluations of
the new currency would occur and a moratorium on government debt
service be imposed under this plan, which would also include a
potential for a haircut of the public debt and debt relief for
private firms with substantial foreign exposure. The option of bank
nationalization would be on the table if necessary. Bootle also makes
recommendations for how the ECB and the EU can, in turn, manage the
departure of a eurozone member.
Bootle’s
plan is essentially what has been put forth by CNBC economist John
Carney, who points out something seemingly obvious, yet apparently
lost on Greek and EU politicians as well as eurozone supporters: that
there is no realistic way to get around austerity within the
eurozone. Similarly, bestselling author Greg Palast, trained as an
economist, has described SYRIZA’s idea of ending austerity within
the eurozone as “fantasy.”
Proposal
“B”: Economist Warren Mosler, a known proponent of modern
monetary theory (MMT), describes larger deficits as a solution for
the economic depression in Greece. It follows that if the EU is
unwilling to relax its deficit rules—a refusal that seems a virtual
certainty in light of the agreement between Greece and the EU for the
maintenance of budget surpluses through 2060—then exiting is
Greece’s best, next, and only option.
Mosler’s
plan calls for the introduction of the new currency via taxing and
spending, meaning that taxes would be levied in the new currency and
spending would occur in the new currency as well, including payment
of public-sector salaries. The denomination of the new currency would
follow that of the euro: i.e., one euro would become one drachma.
Initially
though, the currency would exist only in electronic form. Euro notes
and coins would remain in circulation. However, a process Mosler
describes as a “short squeeze” would follow: with tax obligations
due in the new currency and accepted only in the new currency,
individuals and businesses will have to sell euro notes to purchase
the new currency.
This will
actually place upward pressure on the new currency, alleviating fears
of a devaluation and the loss of value of deposits. Gradually, this
process will lead to the withdrawal of euros from circulation. The
supply of euros would essentially become a foreign reserve currency
for the country, while the new domestic currency would gradually make
its way into circulation.
Notably,
even Yanis Varoufakis, famous for his opposition to Grexit or the
abolition of the eurozone, presents essentially this very plan for
leaving the euro, essentially as a “last resort” for fleeing “a
sinking ship.” It is therefore interesting that Varoufakis refused
to consider raising the prospect of “Grexit,” even as a “Plan
B,” in his negotiations with the troika during his tenure as
Greece’s finance minister. Instead, he agreed to continue 100
percent of the previous austerity agreements before putting on a
final show of “defiance.”
Proposal
“C”: An academic paper written by Yiannis Athanasiadis of the
Erasmus University of Rotterdam puts forth yet another course of
action for departing from the eurozone. This plan analyzes the
breakup of several currency unions, including the cases of the
problematic breakup of the Austro-Hungarian Empire and the somewhat
more optimistic examples of the breakup of the Soviet Union and
Czechoslovakia. It also highlights the examples of Iceland and
Argentina as being more similar to the Greek case—and points to the
more propitious outcome experienced by those countries as a further
reason for optimism.
In his
proposal, Athanasiadis calls for the suspension of debt payments,
along with an audit of the debt and outstanding liabilities;
introducing the new currency at a 1:1 conversion rate (meaning no
devaluation); and introducing capital controls to prevent capital
outflows.
Proposal
“D”: A team of Finnish economists and mathematicians has also put
forth a plan for eurozone departure. They highlight the many
challenges that would face a country seeking to depart from the
common-currency bloc–problems that nevertheless are not deemed to
be insurmountable. The need for secrecy before the transition is also
emphasized, as well as the necessity for maintaining a functioning
system of payments. They also leave open the possibility of the
devaluation of the new currency and the potential conversion of loans
to the new currency.
Proposal
“E”: Greek economist Spiros Lavdiotis, a former analyst with the
Central Bank of Canada, recently presented his own departure plan. He
highlights a six-month transition period during which a country like
Greece would remain in the eurozone while negotiations are held with
EU officials and creditors. He points out that putting the very real
threat of an exit on the table would encourage creditors and EU
officials to negotiate a deal beneficial for both sides in order to
prevent an uncontrolled exit.
During this
initial period, a stoppage of payments on debt and interest would be
imposed. The money saved during this period would be utilized to
finance an initial growth plan for the economy post-exit. The new
currency would be ready to circulate after a few months, and a law
would be implemented making it the exclusive legal tender. The
exchange rate would remain at a 1:1 parity between the euro and the
new currency. Loans would be redenominated but deposits would remain
in euros while withdrawals would be in the new currency. Exiting the
eurozone would also be accompanied by a departure from the EU.
Proposal
“F”: Another Greek economist, Dimitris Karousos, has presented a
blueprint for departing the eurozone. This twelve-step plan includes
the immediate declaration of a stoppage of payments; disputing the
legality of the public debt; canceling all existing memoranda and
austerity agreements, and repealing associated legislation; and
nationalization of the central bank and liquidation of existing
commercial banks.
Imposition
of capital controls would follow, as well as the development of a
payment system to allow transactions to take place until the new
currency is in circulation; maintaining some level of price controls
to prevent gouging and abuse; restoring wages and pensions to
pre-crisis levels; and debt forgiveness for households and small- and
medium-sized businesses, mirroring debt forgiveness that actually was
implemented in Iceland. This plan would also entail a departure from
the EU.
Proposal
“G”: Finally, in the United Kingdom, the Leave Alliance presented
its blueprint for departure from the EU in the absence of any such
plan from the country’s political parties. This plan identifies six
phases of departure, covering such ground as trade negotiations,
regularization of immigration policy and controls, breaking with
Brussels-centric trade regimes, developing wider global relations,
and implementing some degree of direct democracy for future
decision-making.
What should
be evident and obvious from this analysis of a small sample of the
proposals that have been put forth is that, contrary to a common
anti-exit argument that no one has actually developed a plan for how
such a transition can take place, many such plans exist and have been
developed by credible economists, based on reasonable economic
assumptions as well as historical precedent and experience.
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