Introduction
In my last article, I argued that Greece, Ireland, Portugal, and Spain should leave the Eurozone. Why? Because at the € exchange rate they must accept as long as they are in it, their costs are too high. Their costs being too high means their unemployment rates will remain at unacceptable levels and their trade deficits will continue. This article takes the form of an open letter to the Presidents and Finance Ministers of these four countries.
Presidents Zapatero, Papoulias, McAleese, and Silva,
Finance Ministers Gaspar, Carbajo, Noonan, and Venizelos:
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
1. 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.
Issuing Your Own Currency
This is a complex and tricky business. I offer guidelines below, but technical details will remain to be worked out.
The President should announce that the country will be leaving the Eurozone in 30 days. 30 days should be enough time to get currency printed up.
Foreign currency deposits should be allowed, but starting immediately, all government transactions should be made in the new currency. All export proceeds should be immediately exchanged at the central bank for local currency at exchange rates to be determined. The government should run a daily auction for hard currencies. The auctions will help determine market based exchange rates for your new currencies.
Retailers should set prices in the local currency and accept the local currency for sales. If buyers only have Euros, they should be allowed to use them for purchases, using the daily auction exchange rate to determine Euro prices.
The government should not ban foreign currency use. Such bans never work. They only enable criminals to make lots of money. Banks should be encouraged to make exchanges between all currencies at competitive rates.
The government should announce a new 2-year stimulus package aimed at significantly reducing the unemployment rate. The stimulus should be paid for by central bank purchases of the resulting government debt.
How Much of a Default?
I repeat what I said earlier – this is not a morality play. Given your decision to leave the Eurozone, you will not be popular. Believe me, your creditors will be angry whether you decide on a 100% default or a 50% default. But in deciding on this issue, keep in mind that your default will reduce your debt burden and consequently cause your ratings to improve immediately.
I believe Greece should announce a complete default. The debt burden is just too great. The IMF projected interest payments on the debt in 2011 at €16.1 billion. To put this in perspective, the entire government deficit was projected at only €18.8 billion.
But interest payments are not the only problem. The IMF projects the Greek current account deficit at €18.5 billion. Amortization payments on the government debt are projected at €114.8 billion! Forget it. This is hopeless. The banks know this, and that is why they are offering to forgive 50% of the debt. But that won’t solve its problem. Greek costs are simply too high. Greece needs to pull out of the Eurozone and become competitive again via currency depreciation.
It is conceivable that when Ireland, Portugal, and Spain look at their debt situation, they will decide on a lesser default. But remember that any default, however large, will be problematic. Consequently, you should make sure that your default is large enough so that you can carry the debt burden moving forward.
Concluding Thoughts
Presidents and Finance Ministers of Greece, Ireland, Portugal, and Spain:
The Eurozone does not work for you. The exchange rate is too strong, causing your costs to be too high. The dance being played out by Eurozone leaders is not aimed at helping you. The focus is on saving the banks that foolishly purchased your debt.
You have tried to make the Eurozone work for you. But in so doing, you have run up tremendous debts. It is time to extract your countries from these binds. Instead of entering into ECB/IMF enforced austerity programs, you need to launch stimulus programs to reduce unemployment. You owe it to your people.
And yes, there will be life after defaults. Argentina offers a case study on how it all might work out.