Greedy Goblin

Tuesday, July 7, 2015

How could the Greeks keep the Euro while not getting a dime from the EU

Sorry to interrupt the posts of EVE statistics, but I must share this idea with you! The Greeks recently voted with 2/3 majority that they refuse the offers of the EU/IMF/ECB. "This is Sparta!!!" - I guess. Unless the loaners are completely stupid, they won't give a dime to the Greeks. Greece won't be able to get Euros without loans and must leave the Euro-zone. This means a complete economic upheaval as all contracts and accounts must be rewritten in the new currency and paper bills and coins must be printed (which won't be easy as they scrapped the old ones).

However I have an idea how could they keep the Euro without loans. The individual Greek wasn't in debt, the country was. So he doesn't need the loans of the troika. I have Euros myself, despite Hungary isn't in the Euro-zone. You can get Euros right now if you walk to the nearest money exchange. It's the government who can't get enough Euros. Note: banks are only in trouble because people are running them and this would stop if a solution is accepted.

The solution is that the Greek government leaves the Euro-zone, not the people who are already solvent. What do I mean? All the private trade remains in Euros, like nothing happened, because nothing happened for them. Why should Jorgos Somebody in the private sector care about the government bankruptcy? He creates products and services that are sold on the European market, for Euros.

The idea is that the re-introduced Drachma is used only between the banks and the government as "computer money" without actual coins. The government pays all the pensions, welfare, the salaries of the government workers and everything else it needs in Drachma and also asks for all the taxes, fees and privatization costs in Drachma. The banks automatically convert the incoming and outgoing Drachmas to Euros using the market price, so the people get and pay Euros. If the government earns more than it spends, than the Drachma demand increases, along its price. If they spend too much, then the banks have to convert more Drachmas to Euros than opposite, decreasing its price. The point is that it doesn't matter how much they earn and spend, the government is always at balance in Euros.

Obviously this is not without effects on the society. The pensions, welfare and government worker salaries would be fixed in Drachma, so in Euros (which they actually get and use) it would change month-to-month according to the currency rate. If Drachma price would decrease, it would immediately mean restrictions in the inactive and governmental sector (less pensions, less welfare, less salary). It doesn't take a seer to tell that Drachma will indeed fall, so the net effect would be the same as it would be after accepting the troika offer. Who would have guessed that 1 + 1 = 2?

However the private sector wouldn't be affected, as they earn their salaries in Euros due to selling products for Euros. As taxes are % of total, they would pay always the same tax in Euros, however it would mean more Drachma income for the government in case of lower Drachma prices. So the productive Greeks would be safe from the consequences of too many Greeks being unproductive and motivate the latter to become the former. The government could no longer cheat with the papers, as the currency exchange market would do the booking. This scheme could later be used by other countries that doesn't have a financially stable government: the government and its sector stays in their currency, while the private sector can be converted to Euro-usage.

Finally and most importantly: the government could go default on its loans without any effect on anybody but the loaners and its own ability to get further loans (which is already crap).


Basil said...

The government has already defaulted on its loans, and will continue to do so since they spend more than they earn.

No matter what solution you come up with, the current citizens of Greece are going have to suffer. You can stack the game any way you want, including your way, in which people who aren't currently productive bear the load, but there's no way to avoid this.

As far as stacking the game, it is, of course, easier to do it your way since productive people are generally better able to leave and find a better country to live in than retirees.

The reason you suggest this is going to be that you believe most of the unproductive Greeks to be lazy, but that argument doesn't hold water. There's no way to separate people who could be productive from those who, for example, already were. People who had a long and average career who are now losing their pension. That pension was part of their compensation, and is also the reason many of them elected not to save on their own for retirement.

I would also argue that your ideas about how much damage unproductive people do to an economy are overblown. The problem here was never the lagging productivity of Greece, it was the massive and irresponsible borrowing the Greek government of the 2000s that caused the problem, and it never would have happened if they hadn't lied about their deficit.

All that said, the people responsible for the problem can't fix it, and the only way out is for Greeks to suffer. Which of them suffer, how long they suffer, and how badly it hurts the rest of the world are all we're arguing about now.

Anonymous said...

I read about a dual currency solution a fair bit. Google of "greece dual currency" shows discussion it in 2011 and 2012 as well as now.

Attempting to be a Skeptical Thinker said...

It's the inevitable march of leftism towards communism. There will be no return to sanity until they reach the stage where, in their effort to achieve the virulent pipe dream of the collective utopia, the murders by the state have run their course.

The Greeks have simply forgotten the that basic need of life, productivity.

Anonymous said...

not sure I'd want to live in a country where the police and teachers are on half pay

Gevlon said...

@Basil: no, no and no. They didn't pay the IMF, but the IMF call it "delay" and not "default". There is no default until an unpaid loaner says so.

The Greek budget is 1-2% positive without loan interest, so if they'd default once, they could probably stay afloat without further loans.

There is a simple way of separating the potentially productive from the unproductive: offer them jobs. This can be done by tax cuts (which need spending cuts) and language training (could be paid by EU) to allow working abroad.

The current pensioners were the ones who voted for the cheater governments since the eighties. Only the new-voter youth is innocent in Greece. While the governments indeed were cheaters, they didn't steal the money but spent it on the people. So actually it's the Greek people who got the loans.

@Anon: they won't. As they are productive people, they have the option to quit and go somewhere else. If enough does it, the government will be forced to raise their salary. This is happening right now in Hungary, where police, teachers, doctors and nurses get a raise due to mass quiting.

Anonymous said...

I think you missed the boat on this one. Your "solution" is to let the Greek government inflate its internal currency at the expense of pensioners/employees while the private sector still works in Euros. This is functionally no different than just cutting pensions and paychecks directly. You don't think people will notice? Here's a news flash, those people are probably paying on private loans in Euros. If you cut their payouts (by any means) they'll end up defaulting on them, which pushes the debt problem into the private sector that you think is doing just fine.

Greece also has problems collecting on taxes as it is. It's a classic example of how pushing up the tax rate just pushes people toward tax evasion. Don't assume that tax revenue will magically go up under your dual currency solution. Rather I'd expect tax evasion and black market activity to go up instead.

The bottom line is that either someone shovels more money at Greece, or they don't. If they don't, Greece has to spend only what it can collect in taxes, regardless of whether it's in Drachma or Euros. At least if/when they default, they can cut loan repayment out of the budget.

Gevlon said...

@penuruloki: of course it's equal to cutting pensions and paychecks. However this method solves the trust issue. The Greek governments can no longer cheat.

"Private sector" is an incorrect/useless term. Just because Adam has a defaulted loan in Bank X, Betty and her banker Y are fine. Unless Y bought poisoned papers from X. Which is their damn fault and the loss is on them.

Raziel Walker said...

Greek government and EU are just trying to find our who is best at bluffing.
If banks are too big to fail, countries are too big too fail.
If not, it just proves that saving the banks was a huge mistake.

Gevlon said...

Everyone on the planet knows that saving the banks was a huge mistake.

Anonymous said...

"Everyone on the planet knows that saving the banks was a huge mistake."
No, idiots tend to believe that is true. The reality is that without banks the global economy wouldn't survive and your money and ability to earn would be worthless. I enjoy not living in abject poverty, so let's keep the banks around.

Gevlon said...

Who said I want a bank-free world? As long as there are customers, there will be banks. Just the old ones go bankrupt and their investors lose their money.

What you say is equal to "we can't live without air travel, so we must save Pan-Am"

Anonymous said...

I don't get it. fundamentally money is made in debt plus interest. if all debt is paid there will be no money left to pay for interest.

As far as my brain can comprehend. on a country/government level; everybody is happy if you can pay your interest of your loans. And Greece did fail to do that or can't keep up. Now they are forced to do the england thing "austerity"? But refuse to do that.

Dàchéng said...

Gevlon, you said:
"The current pensioners were the ones who voted for the cheater governments since the eighties"

Well, I'm sure some of them were, and some of them voted against those governments. But your suggestion is that all Greek pensioners should basically lose their pension, at a time in their lives when they are least able to find employment.

Bob said...

A parallel currency wouldn't work because it would still to be bench-marked against the euro. If I've imported goods into Greece that the Government would want to consume I need to know the value of that parallel currency against the euro; which I'm being billed in but my suppliers.

Greece isn't California issuing IOUs against future revenue. That may work when you are one of the World's largest economies; not when you are Greece.

The moment they launched a parallel currency any actual euros left in the system would just disappear as people converted their assets to euros.

What you have in the EU now is two camps. Those in the eurozone who are desperate to to keep the political dream of a common euro currency alive. Then there is the other camp in the eurozone that want Greece out so they can access funding from the rest of the EU member states what aren't pouring cash into the Greek economy.

The simply truth is that Greece fiddled the books to get into the euro and the other members of the euro turned a blind eye to the clever bookwork.

They are paying for it now.

Gevlon said...

Not "lose", "decreased". Greek pensioners still get more than Hungarian ones, despite we aren't in bankruptcy.

About people who didn't vote for cheater governments, they still received the higher life standards provided by it. If you accept a gift, knowing that the item is gained by crime, you commit a crime too! They could save this money for the rainy days that they knew will come. I saved money for the rainy days, exactly because I did not support the crazy economics of my government:

Luke said...

The error is assumption, that there is sizeable chunk of population, that is interested in honest work for hard money.

Instead you have special interest groups, all trying to get their cut. At that point, if it is pensioner that thinks that country owes him, or corporate head that expects law to be flexible for his demands, they want a piece of the pie.

In comparison, the amount of people actually working for their pay is tiny.

10 815 197 population per 2012 census.
17% (1.8 million) 65+, pensioners
68% (7.3 million) 15-65, potentially employable
15% (1.6 milion) underage, non-working

So, already pensioners are 20% of voting population.
Workforce size is estimated at 5.05 million, out of it 0.7 mil in public sector.
Which leaves 4.35 mil that can be potentially employed in private sector.
47% of voting population.
Out of it, 2.8 mil is actually employed, 30% of voting population.

Which explains why no sane options would ever be on table. Status quo is too entrenched. If you want to "win" elections, you must cater to special interests.

Also, this situation is by no means unique to Greece. Actually, it has quite sizeable workforce in relation to population (also, it also scores high regarding hours worked). Still , a "democratic" rule ensures economic failure for all.

Anonymous said...

"Who said I want a bank-free world? As long as there are customers, there will be banks. Just the old ones go bankrupt and their investors lose their money.

What you say is equal to "we can't live without air travel, so we must save Pan-Am""
It's nothing like that. If a large bank collapses, especially a central bank, the countries economy would go with it. It doesn't matter if Joe Bloggs thinks he can start up Joe's Bank because the core principle his business would be based around is broken. It would require a different country to step in and inject value into the economy by creating their own bank, or that country to entirely bank outside of the country.

Allowing banks to collapse is the classic "cutting off your nose to spite your face". In the vast majority of cases, it would damage people more than the alternative of propping them up.

Gevlon said...

@Luke: we are in the special situation where external pressure can overcome the leechocracy, in a sense that the EU/ECB/IMF is in the situation of giving a "this or Mad Max (or Putin's vassal)" offer to Greece.

@Anonymous: complete economic collapse is survivable, new banks and even new currency can be introduced The "you must save us or we are doomed" is a banker lie. The "it would damage people" is also a lie: the damage is already done, we are only arguing over who will bear it. I say the investors, stockholders and employees (by being fired) should bear it first, not the taxpayers.

Raziel Walker said...

I don't think anyone will ever be able to convince me banks are essential to the survival of the human race and anything less means they should be allowed to fail and die as any other company is.

I have money at the bank. Bank fails. I get receive up to € 100.000 from the government/central bank and anything else is lost. A new bank opens and I put my money in a new bank account.

You claim a countries economy goes down with the banks. That's a shame, just rebuild your economy then. A country still has it's assets, land, taxable citizens and everything else. The only thing that that broke and has to be rebuild is trust in financial institutions.

Anonymous said...

I think this is already done on a large scale. In former Yugoslavia even before some states entered into the EU the Deutschmark was the official currency.

As you wrote, if private persons wish to conduct their business in Euros they are free to do so. Especially with so many Euros still being in supply.

Luke said...

There are multiple facets to it.
Trying to simplyfy it: there are three distinct functions that share name of banking
1) Deposits aka keeping valuables safe from theft
2) Investment, connecting those with spare money with those needing capital for business ventures, where banks are "trusted 3rd party"
3) Money/wealth transfers.

Problem we face now those basic functions mutated. Deposit function and investment function merged. Traditional "loaning saved money" is replaced with collateral lending, etc etc. Though trend and popular perception shift is clear: instead of being trusted intermediaries banks become primary players on financial markets.

Then there is issue of wealth versus money, again - lost distinction. In times of tangible money those were interchangeable terms, but it is not now, when essentially money is created on demand by the banks themselves.

So, are we talking about banking functions in their basic sense, which are essential to the economy, or the current banks? Are we talking about numbers created on demand, based on supposed value of often theoretical collateral, or actual wealth created and exchanged by actual human beings?

You can torture numbers all day long, but gravity is gravity.

Anonymous said...

"I have money at the bank. Bank fails. I get receive up to € 100.000 from the government/central bank and anything else is lost. A new bank opens and I put my money in a new bank account."
Where do you think that money comes from? With most of the bigger banks, the government simply wouldn't have the cash to cover everyone to that level and for the parts they payout, you'd lose in government services. Instead what happens is that the government buys into the bank which gives them an injection of cash then they sell at a later date once the bank recovers. This way the government doesn't have to pay out a shockingly large sum of money it will never see again.

Banks aren't bailed out to save the bank, they are bailed out to save the government having to pay out to individuals. If it were a simple case of "bank disappears new bank appears" I'd be in full agreement, but in reality it's not so simple.

Anonymous said...

"I think this is already done on a large scale. In former Yugoslavia even before some states entered into the EU the Deutschmark was the official currency."

Montenegro uses the Euro as its official currency, against the wishes (although seemingly, no action has been taken) of the EU.

A number of countries use the US$ as their official currency, without the assistance of, but seemingly without public opposition by the US.

Provi Miner said...

not sure if you are following things but here is the crux of the issue. It isn't the individual greek, it isn't even the government (as you pointed out) that is the issue. Rather its business.

Consider the shortages that are currently happening. is it because there is a lack of goods? no

first normal business I deliver 100 liters of fuel to you on june 1st require 1000 euros for the gas. Now if you pay by june 5th I will take 950 euros, if you by the 15th I will take 980 euros, if you wait till the 30th I need all 1000 and so on

The problem is that I no longer am accepting the idea of waiting to be paid, after all if the country leaves the euro I am screwed for that 100 liters (if you so choose). So now I will deliver 100 liters but you have to pay me 950 euros upon delivery. You can't pay me because you can't access that much cash (if you have it) most likely you don't have that much liquidity in your operation. Your normal course of business is to sell that 100 liters and then pay me back once you have reached the 1000 euro mark (if you are smart you will save so that eventually you can pay me earlier and earlier saving yourself even more money). However because you have been stretching for the past few years your reserves are gone (just as mine are) so I can't give you goods on a promise to repay, you can't pay for goods upon delivery. Now we are stuck. you and I are solvent, you and I are fine we could do as you suggest nor problem. However your company and my company are not in any shape to do as you suggest. In fact both of our business models are broken and only investments and loans will work.

Now we could talk circles forever about debt and company's why its good why its bad. But why bother, the neatest thing about economics is that when the theory of economics hits the pavement it never really survives. Free market capitalism does though. You get what you pay for and you receive what you can sell for there is no "bridge" there is no "IOU's" and such. The basic problem with modern economics is that its based on a forward progressing theory that does not (at any level) account for reality of "shit happens" Sometimes you can paper over it (the US economy and QE 1 2 3 4 5 6000) and make it appear to work, but at the end of the day someone somewhere is getting paid in something tangible. When that someone no longer gets a tangible good the whole "economics" theory falls down faster than a whore on fleet day.

Bart Sertan said...

An interesting idea. I don't know enough about economics to know if it would work. I do know that Greece has some severe issues. Just to be clear to any north American posters here........Greece's problems are not caused by an overly high tax load or by socialist government policies. Countries like Sweden and Norway and Germany have high tax rates and fantastic social programs but they are not in the same state as Greece. Greeks want super social programs, retirement with full pension at 57 and NOT to pay taxes. Tax evasion is rampant by private citizens and by businesses. So.....all sorts of gov't spending on social programs and pensions and reduced tax the math.

No matter what happens it will be bad for Greece and the Greeks

Anonymous said...

Something like this is "probably" what will end up happening already. If the Greeks end up forced out, the de-facto consequence of a German insistence in both, being paid in full, and continued austerity perpetually shrinking the Greek economy, then yes most of the private transactions will end up being done in Euros, while the operations of the state occur in, presumably, a new Drachma.

Jedran said...

Bit off topic, I was reading the comments to your 2011 post that you linked and I was curious as to how it all worked out in the end considering many of the comments seemed to say you were being stupid in putting your money into USD. Did it work out for you in the end?

Gevlon said...

@Jedran: well, Hungary didn't go bankrupt as I feared, so the extra safety wasn't needed. However the USD was 230HUF when I made the deposit and 288 now, so I made 25% "interest" for my deposit in HUF over 3.5 years, that's about 6.6%/year, about twice as much as I got in a bank account deposit. Sure I could make more on stocks but I could also lose it.

Anonymous said...

Sure I could make more on stocks but I could also lose it.
(I don't have much knowledge on financial stuff, economics and stock market. it all seems wizards magic to my brain.)
Isn't your "USD in a box" a stock? It still relies on exchange rate and the possibility to find someone to exchange it into the currency you need when shit hits the fan in the future. with 2008 market crash and now with asia market crashing I was thinking the exact same thing as you did in 2011. I'm not red but don't have much savings either, so till now I didn't thought of splitting my EUR stash. Now it accumulated over time on my bank account so i should do something before it is to late and shit hits the fan.
Why didn't you go an other currency? YUAN is also relatively wide spread and they have a thriving black market too.

Nutroll said...

Probably best to stay in dollars for the midterm. All currencies are pyramid off each other, but the dollar is the base. Like the finale in a fireworks show, it goes off last and it goes off the biggest. Gold and silver should probably trend downwards (along with the us stock markets) over the midterm while Goldman Sachs expects the EURUSD to reach parity or near parity.

When that has occurred for a while then would be the time to get out of the dollar, imo. **I am not a financial expert of any kind. I don't play eve anymore either, I just come here because Goblin has an entertaining blog.