Plan to Leave Euro for Drachma Gains Support

Whispers of Return to Drachma Grow Louder in
Greek Crisis

By Landon Thomas Jr.
New York Times, November 1, 2011

The political upheaval in Athens has suddenly made the once unspeakable – Greek debt default – a distinct possibility.

So now it is time to ponder the once unthinkable: that Greece might end its 10–year use of the euro and return to its former currency, the drachma.

Such a move is still officially anathema in Athens. But a growing body of economists argues that it would be the best course, whatever the near–term financial and economic implications. And now, with a referendum on the European–led bailout facing Greek voters, a vocal minority that has long called for a return to the drachma might find itself with a growing group of listeners.

A return to the drachma is unlikely to offer a quick cure for Greece's ills. Default on the nation's $500 billion in public debt would become a certainty, depositors would take their money out of local banks and, with a sharp devaluation of as much as 50 percent, inflation would loom. A return to the international credit markets would take years.

But drachma defenders contend that these worst fears are overdone. Yes, there would be disruption and panic initially. But, they say, pointing to Argentina's case when it broke its peg with the dollar in 2002, the export boom ignited by a cheaper currency and the ability to control the drachma would eventually work in Greece's favor.

"The real problem is that we are operating under a foreign currency," Vasilis Serafeimakis, a senior executive at Avinoil, one of Greece's largest oil and gas distribution companies, said of the euro. In the last year, he has been banging the bring–back–the–drachma drum.

"If we had our own currency, we could at least print money," Mr. Serafeimakis said, referring to the ability to revalue the drachma. "And what is the worst thing that happens if we do this? I don't get a Christmas gift from one of my bankers."

His voice is still a lonely one.

According to a recent poll in the Greek newspaper Kathimerini, 66 percent of Greeks believe that returning to the drachma would be bad. But proponents of a euro exit say that beneath the surface, more Greeks are beginning to question the euro.

"The view that Greece should exit the euro is more widespread than you would think," said Costas Lapavitsas, a Greek economist at the University of London who has long pressed for a return to the drachma. "It is just that the opposing view is so dominant."

Until now, many Greeks have been wedded to a European identity forged by a national embrace of the euro and the wealth that, for a time, came along with it. Talk of returning to the drachma had mainly been held up as an apocalyptic vision rather than a viable policy option.

But for a growing number of Greeks, the collapse of their economy is apocalypse enough.

Prime Minister George A. Papandreou threw down the gauntlet to the Greek people Monday when he surprised the world by announcing a referendum on the latest bailout plan. But it was his finance minister, Evangelos Venizelos, who that same day put a finer point on the question.

"Are we for Europe, the euro zone and the euro?" he asked. Or, he continued, does Greece return to the drachma?

Under the latest bailout plan from Europe, Greek debt held by private institutions would be written down by 50 percent. In return, as long as Greece stayed on track carrying out painful austerity measures through 2015, Athens would continue to receive more bailout money to finance its remaining debt.

When Mr. Papandreou brought that tentative deal back from Brussels last week, the escalated protests and rioting on Greek streets were a sign that it was not something his people would easily stand for.

Supporters of a return to the drachma note that the severe budget cuts of the last two years had resulted in almost closing the budget deficit – as long as interest payments on its debt are not counted.

Stripping out interest payments, Greece is expected to register a budget surplus next year of 1.5 percent of its gross domestic product (compared with a budget deficit of 8 percent of G.D.P., when interest is counted), and that, in effect, would give it the freedom to stop paying its debts.

It is an argument for defaulting on the debt and starting over, in other words. That sense of reborn autonomy is what lies behind the drachma movement that Mr. Serafeimakis is promoting.

For more than a year, he has been educating himself about the euro. He has pestered economists and written passionate posts on obscure blogs, convinced that the benefits from a devaluation of Greek's currency, while no doubt painful, would result in a return to growth more quickly than further wage cuts and layoffs.

Outside the country, meantime, many prominent voices have argued for more than a year that it is impossible for Greece to regain competitiveness while clinging to the euro currency. They include prominent economists like Nouriel Roubini, Kenneth S. Rogoff and Martin Feldstein, as well as the investor George Soros.

Now, a small but growing band of Greek economists, none of them very well known, is beginning to ask the same question: namely, whether the benefit of having a cheap currency under Greek control would outweigh the costs of defaulting on its debt and abandoning the euro.

In a recent paper, Stergios Skaperdas, a Greek economist at the University of California, Irvine, argued that a cheaper drachma would stem imports, bolster exports and, crucially, give Greece the flexibility to control its own monetary policy and ease the effects of fiscal retrenchment.

Mr. Skaperdas conceded that getting this view across remained a difficult one as many Greeks found it troubling to accept that their euro dream might be over.

"For most Greeks, including economists, adopting the euro was like marrying a dream spouse – beautiful, intelligent, caring, even rich," he said. "And then, rather suddenly, the marriage turned into a nightmare."

A euro divorce would carry substantial costs, most profoundly an immediate run on Greek banks. That is why mainstream Greek economists insist that there will be no such outcome.

"There is no way that Greece leaves the euro – this will take us back many years," said Yannis Stournaras, an influential economist in Athens who has advised past governments. "We would have a disorderly default, the debt would double – it is out of the question."

But in a recent study, Theodore Mariolis, an economist at Panteion University in Athens, argued that the No. 1 problem for Greece under the current system – ahead of debt sustainability, unemployment and the problems of a mismanaged public sector – was its international competitiveness, which he said had declined 30 percent since the country embraced the euro.

Mr. Mariolis estimated that a 50 percent devaluation of the new drachma would soon erase this competitiveness gap.

The views of Mr. Mariolis and Mr. Skaperdas have remained within the narrow confines of academia. Other economists, like Theodore Katsanevas, have taken a more aggressive approach by pushing their drachma solution on Greek television.

"A Greek hotel room is two times as expensive as one in Turkey," he said, ridiculing the notion that the steep wage cuts and public sector firings that are being demanded by Europe and the International Monetary Fund would restore competitiveness. "We are almost dead now – what we need is a resurrection."

In many ways, the drachma's most passionate and well–known local proponent is also its most controversial.

For the last two years, the media magnate George Kouris has used his flagship tabloid, Avriani, to run a relentless campaign that argues Greece is best off leaving the euro for the drachma.

Mr. Kouris, owner of the country's leading evening news channel, is a die–hard opponent of Mr. Papandreou, and he has been accused of pushing the drachma as a means to wipe out his group's significant euro debts, a charge he denies.

But he is insistent that the only way forward is for Greece to return to an earlier time.

"The people who now support the euro are the people that put us into it and made us a sick country," he said. "Before the euro, a bottle of water was 0.50 drachmas. Now it's 1.70 euros. It is a tragedy."

(*) Eleni Varvitsioti contributed reporting.

Austerity Faces Test as Greeks Question
Their Ties to Euro

By Steven Erlanger
New York Times, November 1, 2011

Paris – The crisis of the euro zone has finally hit the potholed road of real politics, with the Greeks now openly questioning whether their commitment to Europe and its single currency still matters more to them than control over their own future and economic well–being.

During the two–year financial crisis, the wealthier countries of northern Europe, led by Germany, have insisted that their heavily indebted brethren in the south radically cut spending in return for emergency loans. They have stuck to that prescription even though austerity has undermined growth and increased unemployment in Greece, Spain, Portugal and now Italy, betting that people in those countries will swallow the harsh medicine because their only alternative is to default and possibly leave the euro zone altogether.

The turmoil in the government of Prime Minister George A. Papandreou means that Greece is about to call that bet. Many Greek politicians appear to be calculating, at this late stage, that they have more to lose by sticking to Germany's terms than by risking a messy default, and even going it alone with their old currency, the drachma, outside the euro zone.

Austerity, in other words, is facing its first really big political test.

"This is clearly the return of politics," said Jean Pisani–Ferry, director of Bruegel, an economic research institution in Brussels. "The management of all this by the Europeans has been fairly technocratic. But now we see the gamble of a politician, which creates uncertainty again, but in a different form. But it was bound to come at some point."

Mr. Papandreou's decision to press for a popular referendum on the bailout was the inevitable result of Greece's loss of sovereignty to Brussels and the International Monetary Fund, said Jean–Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France were acting as if they were the real government of Greece, he said.

"It's as if the Europeans – or Merkel and Sarkozy alone – believed that they were in control of the people of Greece," Mr. Fitoussi said. "But this is a democracy. In Greece, and even in Italy, you cannot expect to rule without the support and consent of the people. And you can't impose an austerity program for a decade on a country, and even choose for them the austerity measures that country must implement."

As the crisis has unfolded, this tension has only increased. Complex bailout packages are hammered out by officials in secret, then are usually sent to parliamentary majorities for approval, without much recourse to the democratic voters of the 17 European Union countries that use the euro, all of which must approve each package.

As a result, the entire euro zone has found itself periodically at the mercy of seemingly minor events – the fall of the Slovak government, a court ruling in Germany, a possible referendum in Greece – that threaten to bring down the whole structure and wreak havoc in financial markets worldwide.

The combination of back–room deals and ad–hoc parliamentary approvals is necessary because the European project is essentially incomplete. The 17 countries that use the euro do not have common fiscal policies or political leadership, and have widely varying levels of development. They have a common central bank, but its mandate is far more limited than that of the United States Federal Reserve, which has intervened much more aggressively in the markets to shore up troubled American financial institutions.

That has left euro zone leaders struggling to cobble together rescue packages big enough to reassure markets but small enough to pass muster with their own reluctant voters. Both voters and markets remain deeply skeptical.

For some time now, experts have been wondering at what point Europe would reach its "Lehman moment" in the crisis, that point where the problem can no longer be addressed with half measures. If Greece, faced with a second bailout and another set of austerity demands, now says "Enough," that point may be reached, forcing a choice between a smaller euro zone or a softer, longer–term rescue policy that emphasizes growth.

A Greek rejection of the deal could at the very least put new pressure on the European Central Bank to continue to prop up heavily indebted nations by buying their debt or even becoming a lender of last resort, like the Federal Reserve. That is a step that is anathema to Germans, who see it as violating European treaties to benefit irresponsible nations. But treaties can be changed, and Mr. Sarkozy still considers the bank to be the best answer to the problem of how to set up a firewall to protect the vulnerable while they try to fix themselves.

Mrs. Merkel and Mr. Sarkozy are clearly irritated with Greece, but so far they insist that the restructuring deal agreed upon Thursday in Brussels remains, as Mr. Sarkozy said Tuesday, "the only possible path to resolve the Greek debt problem."

But Greece's turmoil has the makings of a turning point. Greek elections during a deep economic slump would be likely to usher in a government that would, at a minimum, to try to renegotiate the bailout deal with European and foreign lenders, a messy process that would force Germany and other European lenders to decide how strictly to stick to their austerity formula. The uncertainty would undermine confidence in other indebted countries like Italy at a time they can ill afford it.

There is also the possibility that an election or a popular referendum would pose the question more bluntly, with Greeks essentially deciding whether they want to stick with the euro or not – if they want to put sovereignty over their own affairs ahead of membership in the common currency. That could mean the fraying, or at least the shrinking, of the euro zone.

Mr. Fitoussi believes that Greeks had no choice but to ask themselves that question. "There are only two possibilities in a democracy: the government has to resign or consult the people," he said. "Of course, I don't know which is the worst for Europe."

A Referendum Spells Trouble

By Daniel Gros (*)
New York Times, November 1, 2011

Sovereign debt is debt of the sovereign – and this sovereign can simply decide not to pay.

This was the key message when the Greek prime minister announced that the country would hold a referendum on the most recent rescue package agreed at the European Council of last week. Investors in euro zone bonds have now been put on notice that when the going gets tough, the real sovereign – "we the people" – might be asked whether they would like to pay, and are likely to say no. Greece might simply be the first to take this approach; nobody can guarantee at this point whether Portugal or Italy might be next. The result is predictable: a soaring risk premium for any debt from such periphery nations.

This decision to invoke a referendum could thus mean the beginning of the end game for the euro.

It also implies that all those grandiose plans of creating a political or fiscal union to support the euro have one fatal flaw: governments may sign treaties and make solemn commitments to subordinate their fiscal policy to the wishes of Brussels (or to be more precise the wishes of Germany and the European Central Bank). But in the end "the people" remain the real sovereign; and they can choose to say no. They can also topple the political leaders who push for European unity and austerity, as is happening in Greece with the confidence vote against the prime minister and his referendum.

The E.U. remains a collection of sovereign states and cannot send an army or a police force to enforce its pacts or collect debt. Any country can leave the E.U., and of course the euro area, when the burden of its obligations becomes too heavy. Until now, it had been assumed that the cost of exit would be so high that it would not even be considered. No longer.

One should not forget that the U.S. had to settle this question of exit from a union in a bloody civil war. In Europe only ink will be spilled, but the economic cost will be immense.

(*) Director of the Center for European Policy Studies in Brussels.

This Could Be the End of the Euro

By Edward Harrison (*)
New York Times, November 1, 2011

Papandreou's decision to call a referendum has put the Greek government at risk. Indeed, the government may collapse before any referendum is called.

But the decision was necessary because austerity is deeply unpopular in Greece and has already caused tremendous social unrest. The new deal would see a cut of 100,000 government positions and the permanent presence of the European Union, the International Monetary Fund and the European Central Bank to ensure compliance. Given the widespread perception among Europeans that the E.U. system is undemocratic, there was no alternative but to put these measures to a vote to ensure their political viability in an already volatile social environment.

Given popular sentiment (60 percent are opposed to the measure), a referendum would likely fail. Greece would default with higher bondholder losses, triggering credit default swaps and crystallizing losses across the European (and U.S.) banking system. Greece and its banks would be insolvent. A "no" vote would also mean even greater immediate austerity as Greece would be cut off entirely from external funding sources.

Will the collapse of the Greek government destroy the euro zone? It certainly could. Italy's recoupling to the periphery is well–advanced, making it now the focal point of the sovereign debt crisis. Bond yields in Italy and elsewhere in the European periphery have skyrocketed. Contagion has spread to the banks as well.

Meanwhile, the euro zone has already started a double dip recession, which will cause Portugal and other periphery economies to miss their deficit targets. Redoubling austerity efforts under those circumstances means civil unrest would likely spread to these countries as well.

The E.C.B. has been forced to intervene for Italy. However, the damage is already done. Unless the E.C.B. acts as a lender of last resort, it is game over for the euro zone.

(*) Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors. He is also the principal contributor to the financial Web site Credit Writedowns.