In Defense of Greece: An Open Letter to the IMF
Managing Director Lagarde:
In retrospect, I think it is fair to say that all the major players in the Greek tragedy share some blame for what happened:
- The Greek authorities for approving far more generous pensions and other benefits than the country could afford;
- The European bank regulators for allowing banks to treat sovereign debt like cash in calculating their reserves;
- The European banks for purchasing so much Greek debt in light of the country’s deteriorating economic situation;
- Other Eurozone members, led by Germany, insisting that even today, austerity is the answer and no further debt forgiveness will be given.
Admittedly, the Fund’s position is somewhat more nuanced. It started by agreeing that severe austerity was the answer. But it backed of austerity when it saw Greek unemployment jump from 9.6% in 2010 to 27.5% in 2013. It then switched to insisting on a huge structural reforms and further debt forgiveness. In reality, the structural reforms the IMF is insisting on, will be just as deflationary as the earlier austerity measure were. Why, because virtually all of them will result in reductions in government expenditure or increased tax collections.
So where do things stand today? Stasis:
- Greek authorities are fighting for their political survival. They agree to a set of concessions to get desperately needed funding and then delay implementation;
- Other Eurozone countries, led by Germany, insisting on austerity and no further debt relief, and the Fund, refusing to join in another bailout program unless the Eurozone countries agree to further debt relief.
What Should Be Next?
Looking back, it has become quite clear that requiring Greece to use the same currency as Germany does not work. In the simplest of terms, Greece is not as productive as Greece, so having to use the Euro means it will import more than it exports and consequently run out of Euros. If Greece used its own currency, its value would change so that imports and exports remained in balance.
Back in 2011, I wrote an open letter to Karolos Papoulias, the then President of Greece.”
I quote from that letter:
This is not the time for you to be sitting on your hands trying to be Euro team players in hopes the leaders of the Eurozone will solve your problems. They will not. They only care about saving the banks that foolishly bought far too much of your debt.
Were you partially to blame for the Eurozone mess? Of course. But you are not actors in a morality play. Your job is to do what is best for your citizens, and that means getting out of the Eurozone and defaulting on your debt.
Rest assured, it will be a messy process, an open invitation for corruption on a grand scale, and other unexpected surprises. But you should still do it. If you don’t, your unemployment rates will go even higher and your trade deficits will exhaust your already-depleted international reserves. In essence, your costs are too high and getting out of the Eurozone and defaulting on your debt is the only way to get them down.
What Needs to be Done
- You must issue your own currency and make it legal tender for purchases and sales in your country.
2. You must default on all or part of your international debt.
Six Years Have Passed
Has anything of significance changed in the six years since I wrote that letter? No.
Greece is a dues-paying member of the IMF. Consequently, the IMF has an obligation to help Greece think through all of its alternatives. Has it worked with Greece on my proposal? No.
I say that because the issue came up in a recent IMF press briefing. Below, I quote from that briefing. The IMF spokesman is Gerry Rice, the Director of Communications while the questioners are anonymous.
Questioner: …There are cases in which a member country is explicitly — to use your language — has an explicit objective to do for economic policies that the IMF believes to not be in that member country’s economic interests or in the global economic interest. And it speaks truth to power, and yet there has been no analysis to argue why Greece should remain part of the euro or why it shouldn’t. And to me that’s a fundamental economic argument, since you’re talking about internal devaluation versus a nominal exchange rate devaluation. I mean, that’s at the heart of the problem. So can you tell me why the IMF hasn’t at least published its analysis or any analysis on why Greece should remain in the euro or should exit as a part of its truth-telling economic advice to a member country?
QUESTIONER: I just want to follow up on Ian’s question and maybe have another question if you don’t mind. Maybe you can clarify do you think — does the IMF think that it’s in Greece’s best interest to retain its membership in the Eurozone…?
QUESTIONER: And on the first question, I mean, does the IMF still think that it’s in Greece’s best interest to retain its membership in the Eurozone?
Time for Change
Ms. Lagarde: It is time for the IMF to stand back from the table. The negotiations are deadlocked and going nowhere. And even if the three of you can agree on some sort of compromise, it would only be kicking the can down the road. You might not agree that that Greece should leave the Eurozone. But I urge you to think through this option with the Greek authorities.