Is Eurozone membership slowly strangling the Greek economy?

In these digital days it is far easier to foment a revolution than it is to find the means to sustain one. That may or may not been the the Greek Syriza party has to learn in the coming weeks. Hanging hard against German based technocrats may yet pull off some important concessions, but without cash (or rather the means to raise sufficient cash) the Greeks face a hard road to stay inside the Eurozone.

Cormac Lucey, returning to the basic problem of Europe’s common currency, cannot see how Greece’s economic interests are served by trying to stay inside a hot and sweaty German run kitchen:

A decade of loose credit conditions spawned the illusion of very high economic growth rates and the reality of very substantial cost increases across the Eurozone periphery. This sharply reduced the international competitiveness of countries like Ireland. Examining real effective exchange rate data compiled by the Bank of International Settlements, Irish costs rose by nearly 35% relative to Germany between 1998 and 2008. Rating agency Fitch reckoned in 2012 that a new Greece currency could drop 76% compared to Germany!

As for solidarity, it seems that Irish tourists prefer to help the Turkish economy these days:

…in the first 10 months of 2014, CSO statistics indicate that only 36,297 people departed Dublin Airport for Greek destinations. The figure for Turkish destinations was 92,799. Trapped in the Euro, Greece’s real effective exchange rate is too high. As a result, it is uncompetitive. And a European Union which aims at boosting trade among its members is inadvertently discouraging it.

And the debt problem is already huge (for Greece at least)

Current plans envisage Greece repaying to its creditors about 4% of national income over each of the next five years. The new Greek government wants to reduce this to 1.5% of national output each year. With debt of 177% of GDP, annual payments of just 1.5% of GDP would mean that Greek debt wouldn’t even cover its interest cost. Greece’s creditors might as well concede a formal debt write-down, as the real value of their debt would have been significantly impaired.

He concludes:

…substantial concessions may end up being made to Syriza even though the EU will fear that they will spur demands elsewhere in the Eurozone. Let us hope that the mandarins in the Department of Finance have our application ready. The problem for Syriza is that while such concessions may go some distance towards fixing its debt problem they can do nothing to fix its real effective exchange rate problem. And, in my opinion, that is the larger of the two problems confronting Greece, and most of the Eurozone periphery. Syriza may win a significant battle in the coming weeks but still lose Greece’s economic war.

Bundling of such diverse economies has long been recognised as significant design fault. Keeping Greece inside a currency mechanism it was never ready to join (which of course everyone involved knew at the time, but refused to acknowledge).

Lucey’s argument is broader than though

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  • Superfluous

    Well, the problem comes down to Government – the Greek boom was caused by Government spending borrowed money. Wages in Greece increased, so the cost of living increased as labour costs added to product prices/services increased. As Greek wages soared and the price of Greek services/goods soared then of course it would be a more expensive place to visit.

    The key thing to remember here is that Greece is an importing country – its imports are about 50% higher than its exports (GDP value). It’s holding up its standard of living by buying stuff in from other countries on borrowed money. If Greece was to leave the Euro and devalue its currency by about 50% vs the Euro then imports would become twice as expensive, and the standard of living would drop dramatically. The real value of wages would drop, and while it would be cheaper to produce things in Greece (because of devalued labour) most of the materials imported to create things would remain priced in Euros, so there is only marginal win on labour input (and Greeks aren’t exactly known to be efficient with labour).

    So the reason the Euro fails in the southern economies is because their Governments have made it fail – they are living like Keynesians, as if they have control over their own monetary policy and can just inflate their way out of debt, when they can’t (and there’s not a lot of proof that Government control over money is any good in the longer term anyway). They have tried to import northern European products, and not export an equivalent amount of goods – they’ve used debt to make up the difference. There’s no problem with a single currency if everyone lives by their means and if everyone accepts that their living standard is bound to the actual market value of the products they produce.

  • Paddy Reilly

    Greece will leave the Euro zone and devalue. The country is spending a billion dollars a year on dairy, eggs and honey. This is ridiculous. It could produce these things at home.

    The result will be an economy which resembles the 1950s. Everyone will be in work but many goods which we have grown used to will be beyond ordinary people’s means. It will make sense to keep chickens in the back yard, and larger properties will have beehives.

    Greeks will find cows’ milk too expensive and resort to goats’. Greece will be full of tourists on cheap package holidays, leading to universal prosperity. But after 5 or 10 years of this, bourgeois values will set in, and the currency will be revalued, leading to a repeat of the present conditions.

  • PaulT

    The Greeks actually prefer sheep and goat ‘products’ and always have done, as does everyone in the area ie Turkish people

    Dairy farming is a large part of the Greek economy.

    Like every other modern country Greece is an import/export nation and exports as well as imports dairy products. This means we don’t just eat Cheddar, the French don’t eat Brie and yes although they eat a lot of Feta the Greeks also vary their cheese diet.

    However, even if we did follow your plan, rather than turning from homemade product A (say cows milk) to alternative homemade product B (goats milk) because of expense they would turn to a cheap foreign import of product A (because it’s cheap and from a cow)

    I suppose the Gov could impose tariffs on imports of cheap product A, but than those countries affected would impose tariffs on say flights to greece, thus affecting the cheap greece tourism product.

    OK, where are we, back to the 1950’s the natives are paying top dollar for stuff made at home that could have been imported cheaply and the local tourism industry is collapsing. What do we do next

  • Paddy Reilly

    Product A would not be cheap because the drachma would have been devalued. Turkey isn’t even in the EU or Euro and its tourism industry is thriving. So what you say has no validity.

    It is a simple matter of whose interest is being catered to. A devalued drachma would aid local workers, and keep them all in employment, albeit with poor spending power in relation to foreign made luxury goods. An undevaluable Euro suits the interests of moneyed persons, who would like to have access to these foreign luxury goods. Normally the wishes of the latter would prevail.

    However, under present circumstances there are so many unemployed that the moneyed classes are being deprived of their income, as no-one can afford to consume the products they make, etc. This means that support for devaluation has a hope of prevailing.

  • BetsyGray

    Firstly the Greeks will not be leaving the Eurozone…or be kicked ain’t going to happen. Rest assured the issue will be resolved some way or another…its a bluff to shake down the Greeks…but they’re not for turning. Greece is an integral part of Europe and cutting of the Greek limb is not good news for the EU plan and far all of us for that matter. What you will hear is humbug and bluster from the right of Europe…..they undermine the union and its raison d’etre…the Greeks are democrats (the home democracy in fact..!) we must stand with them..!…shame on the quislings in Leinster House.

  • kalista63

    Maybe the Greeks would have more money if they didn’t have to replace their plates after every meal. ?

    Paddy’s year zero is how I imagine the best way for the Greeks to go would look like. It’s got great products and its a fantastic tourist destination plus all that history and culture.