Adonis Diaries

Biter-sweet Euro: Before and after Greece; (Mar. 7, 2010)

Before Greece, you have the States of Lithuania, Hungary, and Ireland that suffered the same fate of a prematurely imposed Euro on States of weak economies. There are many articles analyzing the financial crisis in Greece. I thought that I can make sense in a short post for readers eager to know, but would refrain reading lengthy erudite articles.

There are two main factors for Greece financial problems; and there are two resolutions available, equally painful, but one is far better in shortening the pain and healing faster.

First, the common currency Euro forced weaker economies to relinquish their sovereignty over issuing money in time of shrinking economy in order to re-launch the inner trade.

Second, the US financial multinationals before the crash infused too much credit in a small economy that did not correspond to normal credit rating behaviors. This quick infusion of money inflated the sense of economic boom and generated laxity in financial control and management.  Greece is awakening to new demands for harsher financial control and imposition of higher taxes to straighten the budget balance sheet.

The first remedy is inviting the International Monetary Fund (IMF) to intervene and infuse $1.7 billion in the Greek coffer to pay the debts due this spring. This would be a bad decision. It is a worse alternative because even the EU is encouraging Greece toward that option. For example:

Lithuania GNP shrank 18% in the first year the IMF intervened with its draconian conditions: jobless rate climbed to 20%, the high level in health, education, and retirement suffered greatly. Actually, retired persons are bleeding and the socialist political parties lost ground.

In Hungary, the IMF intervention made sure that the people suffer and the socialist government be replaced by like-minded anti-socialist government headed by the former minister of economy.

If Greece ends up asking the “help” of the IMF, as the EU wishes too, then the socialist George Papandreou will start packing; a decision that will please Merkle PM of Germany.

Greece with budget deficit reaching 13% of GNP and growing, has a reasonable solution out of this mess if it wants to avoid 10 years of suffering and humiliation. Until the EU comes up with a financial recovery plan, Greece should revert to its national currency the drachma. Greece should regain its sovereignty in issuing money in this difficult period: Internal and external trades should not be hampered for lack of liquidity.

Since Greece imports amount to only 20% of its GNP, then better competitive drachma should enhance exports and reduce the loan deficit. With the already strict financial control in place, Greece will be able to shorten the period of its pain.  The EU will accept Greece currency to revert to the Euro in due time in order not to let other Euro member States to follow Greece decision.

Greece should learn how Argentina recovered.  After four years insisting of keeping the currency linked to the dollar, Argentina economy faltered entirely.  Argentina decided to float its currency and it devalued accordingly. Argentina was able to default on $100 billion of foreign loans. The government insured that bank deposits of consumers keep the same purchasing power by regular re-evaluation and re-fixing of the national currency.  People living in their own properties enjoyed the same financial facility at the rate of pre-devaluation.  Within a single semester, Argentina economy was back to normal and going strong.

Greece has choices: either the IMF intervention accompanied by ten years of suffering or reverting to the drachma until the economy is back to normal within a couple of semester.

Note 1:  I suggested in several articles that an internal Euro currency, Euro B, be created for European internal markets. In this case, smaller economies could issue Euro B to keeping liquidity available for their internal market. As the internal economy is functioning and creating jobs, harsh cuts in social budgets will be reduced.

Note 2: Spain, Portugal, and lately Italy have been experiencing bad economical and financial downturns.  If the “Euro B” was adopted, and the current Euro used for just exporting goods and dealing with foreign markets, this Euro would have been in better shape and more immune to currency exchange deals, mostly dominated by the US financial policies.