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6 Νοε 2012

Grexit is the only solution- The origin of the crisis is not its Hellenization, but its Northern counterpart

Konstantinos Katsanevas [1]


The Greeks have always felt a need to be wedded to a supposed European identity. In order for full integration, adoption of a colorful new currency would give them ‘worldly’ status. You see it was always about image. This new sense of self allowed the Greek to one-up Turkey and on top of that create a definite distinction from his Balkan brothers. What a deal!  Add to that with image came a false sense of security, and a surge of capital - not just for Greece but for all the peripheral economies of the Eurozone.  On their high horse they rode right to the grave.


It seems the only whispered ‘Grexit’ was now gaining some ground. So what happened? The truth is not Mitt Romney’s campaign theme, Europe’s welfare state is not to blame. It can’t be fiscal recklessness, nations outside the euro have huge deficits with burdensome debts and still seem to borrow at staggeringly low interest rates of 2% or lower. In fact, Paul Krugman has the right idea - the introduction of the euro without proper institutional foundation effectively reinvented the defects of the gold standard. Great Depression anybody?

For Greece what’s left are two viable options: continue the Europeanization illusion or get out. The benefits of a soft currency outweigh the costs of default. Furthermore, an orderly exit will be painful and will bring collateral damage, but as professor Nouriel Roubini puts it, “it can be contained”.

The argument is sound, give control of monetary policy and depreciate currency effectively restoring international competitiveness and growth. But lets retract; give Angela and her austerity hungry contemporaries a chance. October 2009 - serious doubt on Greece’s ability to meet its debt obligations led to crisis of confidence. May 2010 – queue 110bn euro aid to avert meltdown of economy with the condition of austerity measures; troika sweeps in to save the day. Unemployment past the 15% threshold, debt to GDP ratio hit 127% while public sector cuts in wages and pensions stirs social upheaval. By the end of 2011 troika leaders agree to a second bailout package of 130bn euros and, since things are looking bleak private creditors holding Greek government bonds are forced to accept a 53% face value loss. Debt to GDP ratio reduced from a speculated 198% to a round 160% (2012 forecast). To date, troika has extended reform schedule deadlines from 2013 to 2015 and finally 2017 before it takes off Greece’s training wheels and lets its government tackle the burden alone. Yet slow and orderly disintegration of economy and society looms. Look upon your work Angela.

Lets take a look at the Greek perspective. Here’s some context. Greece’s main industries include tourism, merchant shipping and agriculture with 85% of its output coming from the service sector. Under the Drachma during post-WWII, Greece experienced growth rates ranking first in all of Europe and second in the world, reaching a high of 11.15% annual GDP growth in 1961 (world bank source). Today it stands at a meager -6.9% and since joining the Euro, Landon Thomas Jr reported a 30% decrease in international competitiveness.  So who is at fault here? Is it the lazy Greeks? Negative – Paul Krugman himself admits that Greeks work longer hours than anyone else in Europe and definitely more than the Germans, putting in roughly 42.2 hours per week compared to their so-called Northern brothers at 35.6. Now you’ll scream ‘yes, but what about labour productivity? That’s a better measure!’ It’s low, in fact its yields weigh in at 25% below the European Union average – but similar are Mississippi’s yields by American standards. Yet its not the poster child for the 2008 subprime crisis.

It becomes clear then, that the major contributing factor for Greece - after corruption, tax evasion and insolvency – is the euro. The origin of the crisis is not its Hellenization, but its Northern counterpart. Certain European leaders had the idea that a monetary system could work without a strong central government. Look no further then this; it is the weakness of an all-around progressive idea that has brought forth the tsunami.

Instead of continuously agreeing on short term plans that put off the inevitable Greece must act now to prevent further economic implosion.  Or wait it out, the alternative put forth by Adam Davidson in the New York Times, is that eventually the bond market will have to do the dirty work. Investors will soon enough lose trust in everyone, unload European bonds and send the euro to its demise. Put in perspective, Simon Kennedy, a Bloomberg analyst, stated that Citigroup Inc. economists forecast Greece departing on January 1, 2013.

Nevertheless I digress.  Blame the euro.

Greece’s economic structure is by nature labour intensive. This means it needs many working hands, the cost of which can be compressed only to a certain degree, so that the cost of its yields can be lower than its competitor. But what sort of yields are we talking here? Labour economist Theodore Katsanevas puts it simply – “The Greek hotel room costs the tourist twice as much as that of the Turk, Egyptian, Bulgarian, Romanian and Hungarian. Even the Greek will not choose to vacation in his own home.” A country with little production and a hard currency cannot expect to be competitive in the global market. Without competitiveness there is no growth.

The Drachma will drop by 50% - 520 Drachma for 1 euro - and capital will leave the country that much faster. The Greek will lose two things in this scenario, part of his ‘worldly’ identity and his Mercedes. But what will eventually come from his cheap work, is foreign direct investment and more importantly an export boom. The soft Drachma at dirt-cheap prices will produce a foreign exchange surplus by the end of that same fiscal year. This will cause a domino effect within the nation, keeping capital inflow by buying its own oranges rather than shipping them from Argentina. This is what is best for this nation as a whole. Don’t take my word for it, take a look at a similar economic paradigm that of Argentina, when it divorced its peso-dollar peg in 2001.

As for Europe, contagion can be contained if there is swift and proper recapitalization of weak banks and further preventative actions are taken – something that Angela has been preparing for. Letting Greece go is the best decision for the long-term - for everyone. Yes, it will be painful but something must be done this moment, and since Euro-bonds are out of the question a Grexit is the only way out.

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1. Ο Κωνσταντίνος Κατσανέβας του Θεοδώρου, είναι τελειόφοιτος φοιτητής στο Πανεπιστήμιο του Τορόντο στον Καναδά, και το παρών κείμενο προέρχεται από δική του μελέτη και άρθρο γνώμης που υπέβαλε στο Πανεπιστήμιο.


















































































[1] Ο Κωσταντίνος Κατσανέβας του Θεοδώρου, είναι τελειόφοιτος φοιτητής στο Πανεπιστήμιο του Τορόντο και το παρών τεκμηριωμένο κείμενό του  προέρχεται από δική του Πανεπιστημιακή εργασία και άρθρο γνώμης.The origin of the crisis is not its Hellenization, but its Northern counterpart