CB 1000

3 July 2015
The Only Alternative: Greece Exit The Eurozone
by Nicholas Fowler
Greece Exit The Eurozone
Nicholas Fowler
Nicholas Fowler is a Master's in International Affairs at Texas A&M University. He is interested in history, Latin America, and the European Union.

[dropcap]O[/dropcap]n July 5th, the Greek people will vote in a referendum that is both incredibly important and technically meaningless. The troika (IMF, European Central Bank, European Commission), with the Germans at the head (making it the troika+1), have already declared the outcome irrelevant and the exercise of democracy in a member country grounds for continually harsher coercion. They have no fear of scaring a pro-Euro country into rejecting their demands, which says much about their imperial attitude toward elected governments.

So Syriza should make the referendum on the 5th mean something. Luckily, the troika+1 have pushed Tsipras & co. in this direction by declaring that a vote in negation is a vote to ‘exit the Eurozone’, doubtless a stratagem meant to scare Greek voters into compliance. Syriza should take this as an opportunity to embrace exit and offer Greeks a plan, not just fear.

The Setup

How did we get here? In 2008, Greece was the greatest supporter of the European Union when compared to any other member state. It was promised that accession into the European project would bring it officially into the club of Western nations after decades of military brutality and dysfunctional governance. Gospels of economic reform radiating from Frankfurt and Brussels would see prosperity return to Greece in a way it had not since antiquity.

Seven years later that dream has been ground into dust by austerity, vassalization, and xenophobia. According to polls conducted by the Pew Research Center, only 34% of Greeks are favorable towards the EU at all, 80% believe their voice does not count, and only 11% believe economic integration to have helped Greece. This disenchantment has translated into the electoral victory of the leftist Syriza party, who came within a few seats of an overall majority.

Partially to blame for this reversal of opinion is the setup of European political economy under the euro system. When the euro currency was created, its value was less than that of the Deutsche Mark (the former German currency), so immediately it served as an extra advantage to an already advantaged German export sector vis-a-vis the rest of Europe. To maintain this advantage, successive German governments efficiently squeezed both labor conditions and wages. The myth of a German economic dynamo in the heart of Europe is just that; as according to economist Costas Lapavitsas, “in terms of output, employment, productivity, investment, consumption, and so on, German performance has been mediocre.”

So a current account surplus formed, and this surplus was ‘exported’ (so to speak) via foreign direct investment and bank loans to the periphery (Portugal, Italy, Ireland, Greece, etc). Those states (heartwarmingly abbreviated as “PIIGs” by some European observers) had also attempted to squeeze their working classes and create competitive export industries in accordance with EU mandates, and so were pursuing much the same economic strategy as Germany. As this race to the bottom unfolded, the winner was a foregone conclusion. Real wages are smaller in the periphery, and the welfare state ineffectual, thus the Germans always had more room to improve competitiveness.

To bolster consumption in states where liberalization had cut their purchasing power, German FDI and bank lending created “entrenched current account deficits” in the periphery. Entrenched in the sense that they were structurally bound to accumulate deficits, just as Germany was structurally bound to accumulate surpluses. Consumption was financed not by increased wages nor the opportunity cost calculations that come about when the welfare state handles more of your miscellaneous expenses (like health, education, etc), but from increasing household debt (as was mostly the case in Greece) and investment bubbles that differed depending on the structure of national economies.

Greece’s Finance Minister Yanis Varoufakis discussing says bailout options and the EU. Source BBC

In a desperate attempt to keep their economies afloat, nations across the world temporarily saw debt/gdp ratios skyrocket (even in places like Greece, where government debt was not particularly troublesome before the crisis). Unable to inflate their currency to spend their way out of recessionary conditions but forced to take on increasing debt levels to rescue the financial system (in accordance with general ECB policy), peripheral states opened themselves up to accusations of financial impropriety, a terrible irony. Austerity policy was imposed as a corrective, even as other countries around the world eventually exited recessionary conditions and saw their debt decrease through growth.

The Germans, ever willing to pretend every country can do as they do while making any actual policy actions towards that end impossible, have found themselves unwilling to correct the current core-periphery setup. To that end, austerity has been a crude economic policy and rhetorical device (punishing those shiftless Greeks) to prevent the reforms the EU so desperately needs. The program was given every chance to succeed from 2010-2015, with a Greek political establishment that saw its own people much the same way the European institutions did.

There is little in the troika’s austerity program that would address the true limitations of the Greek economy or political system. Austerity, at its core, is ostensibly a strategy to reduce the debt load of the state (though the debt has become higher as a portion of GDP across the periphery since austerity) and increase export competitiveness (through the destruction of the gains of the working class and the suppression of their bargaining power). It puts no pressure on wealthy EU states or the elite European political class to construct a true EU fiscal policy, but instead creates enemies of peoples.

To justify the humanitarian crises that result from deep cuts in public expenditure and labor protections during economic downturns, the victimized populations have to be portrayed as shiftless, parasitical, or somehow deserving of their fate since they ‘lived beyond their means’ before anyway. ‘Strong medicine’ (choose your euphemism) will return them to growth, and they should be thankful the richer states are bankrolling their laziness and poor governance. And other such nonsense.

The Only Option

So what is Greece to do? The ‘good euro’ strategy of the government has failed. Critics of ‘good euro’ pointed out the inexorable move to tie the European project to the prerogatives of central bankers — the inflation orthodoxy of the Bundesbank in particular — and their grand currency project, the euro. The EU, with its ruthless pursuit of ‘competitiveness’, in this reading comes across as the destroyer of national welfare states and the privileges that come from possessing their own “world money” comparable to the dollar. There will never be a social Europe under this setup because this setup was designed to destroy social Europe.

The only policies on offer now are to increase the power of the ECB, further bind national economies in straitjackets of arbitrary debt and budget surplus targets, and sanctify all debts to creditors. To enforce these policies, the ECB will threaten liquidity crises, as they have done in the current negotiations. With the four month Eurogroup-Greek agreement nearing its end, Germany’s position has once again reverted to hardline opposition against any alleviation of austerity or debt relief.

Syriza has never completely discounted the possibility of Grexit, and for good reason. The Left Platform, which favors immediate exit, is the most powerful faction within Syriza, though not the particular ideological flavor of Prime Minister Tsipras or Finance Minister Varoufakis. Still, their influence has spooked Brussels enough that European officials have made it known publicly that the Prime Minister will have to “jettison the far left” to “make a bailout agreement possible,” preferably in coalition with the generally discredited PASOK or the mostly irrelevant To Potami. Both of those parties represent the platonic ideal of inoffensive, bland centrism, unable to square the circle of accountability to their citizenry and slavish adherence to European austerity strictures, but properly wringing their hands over ‘populism’ when the time comes.

Exit Stage Left

The preferred policy option of this article is progressive exit. In such an exit, the goal would not be to reintroduce the drachma simply to devalue it and increase ‘competitiveness’ — this being the typical IMF reform package by a different route. Instead, a progressive exit would first and foremost default on the debt, and open new negotiating channels outside of the monetary union.
The institution of capital controls to avoid money fleeing the country has been an imperative first step, but the government should next proceed with the nationalization of all banks at least through the duration of the redenomination process. As will hopefully be proven below, decisive exit along these lines would be Syriza’s best shot at not only staving off recurring economic crises and declining living conditions, but also their best shot at protecting their electoral position. Greeks are prepared for sacrifices, but not for indecision.

An Honest Examination

It is imperative that Syriza have a plan for exit and properly articulate it to the Greek people. Though countries like Argentina and Russia (not currently paradises but nonetheless in an improved situation when compared to their time in IMF purgatory) have been successful in the past in defaulting on their debt and repudiating the advice of powerful international financial institutions, Greece is a much smaller country with no abundant natural resources to fall back on. Out of all the potential barriers to success, there are two main dangers that face the Greek government in an exit scenario, aside from a coup by right wing elements in the military or police.

First and foremost, the economic consequences will be immediate and widespread in their impact. The poor and middle classes would see wild inflation, and this inflation might even last quite a while as the government prints money to restore spending in the welfare state and institute reforms across the board in the country. Their purchasing power would decrease even as their reliance on imported food and energy increased. Rationing, already a reality in food, medicine, and transportation will continue, and might worsen in the short term.

Countering economic disaster will require heretical thinking. Greece will be able to acquire imports it needs more easily than it was a few years ago thanks to the end of current account imbalances, and some economists are confident in the ability of small and medium-sized enterprises to “restore demand and production after a devaluation.” Simply removing austerity will have positive spillovers that are hard to quantify, but Greece’s capitalist class also is invested in quite a few fixed assets that cannot be taken out of the country.

In addition and as mentioned before, the nationalization of Greek banks, the introduction of capital controls, and the takeover of strategic industries and corporations will also be vital as short term measures to ensure that “wages and pensions [are] restored, labour agreements [are] honored, employment [is] increased,” and investment returns. How long these measures are in place will hopefully be a subject of heated debate for a Greece that is safely out of crisis and on the path to growth.

Second, in rejecting the orthodoxy of the European Union and scaring the political classes of over a dozen neighboring states, Greece will find itself terribly isolated. Traditional trade partners will, for a time at least, shun Athens and encourage their own allies to do the same. In this phase, the avoidance of national autarky will be vital but also difficult.

In the long term, it is not likely that Greece can be blacklisted forever, as Argentina has proven. Normal trade will eventually resume with Italy, France, etc. There is even the possibility that existing elites become the isolated ones as the ‘contagion’ spreads to the rest of the periphery through parties like Podemos in Spain.

Final Note

We can come to a reasonable conclusion that there is no risk-free option. There is only one option, however, that promises a potential way out of the misery. This is why the risk of exit is worth it and why Syriza should present it honestly to the Greek people.


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