Why Greece Needs The Drachma – Prof G. P. Lianos Athens University of Economics

Article in Kathimerini claims to show the pitfalls of the Drachma when in fact it shows all the positives.

Breaking the article down

1. The first and most obvious negative effect will be to increase the cost of international transactions and for citizens and businesses, because the drachma should be converted into foreign currency and this means various documents and papers, queues in banks, possibly restrictions the amounts, etc.

Total garbage as anyone who holidays outside the Eurozone will know

2. The trade balance of the country and the international balance of payments is negative. This means that without quantitative restrictions the foreign exchange demand exceeds supply and therefore the exchange rate will continuously increase. In other words, the drachma will be underestimated and therefore imported products will be constantly more expensive and exported continuously cheaper for foreigners.

This is exactly what the Greek economy needs to recover and for it to grow its manufacturing base, imported goods need to become more expensive and goods produced in Greece need to become cheaper to give exported products an advantage

3. The continuous devaluation of the drachma will create strong trends for increases in wages and salaries at all levels and thus increases the amount of money and then price. It is sure to relive the vicious price – wage round inflationary period 1974-1996, when inflation was 16% to 22%.

With the amount of tax debt this is exactly what the economy needs to have a fresh start, not to mention, reducing the burden of pension obligations. Inflating away debt is exactly what the economy needs and assets can simply be transferred into other assets or currencies.drachma

4. The service external debt will constantly require larger amounts in drachma since the drachma would depreciate.

This is exactly what is needed to bring government spending under control. Let us be brutally honest, the Greek government is the equivalent of a drunken sailor, the last thing it needs is cheap credit. High cost of debt servicing will force it to live within its means.

It is the low cost of borrowing which caused the current crisis(!)

5. The country’s economic problems do not come from the euro. The culprits, if we can speak for culprits in political life, are among the unreliable and our irresponsible politicians

Agreed, and the Euro is only enabling them to continue. Never was an economic downturn as bad as this with the Drachma. If the government cannot adapt to the environment of the Euro the country must leave the Euro. The government is expecting the private economy to 100% pay for the costs of the Euro and we see the results. The government needs to adapt and if cannot then the Drachma is the next best solution.

6. The conditions for our current mess created when we had the drachma, when governments borrow

And the debt load increased when it was confirmed that Greece would enter the Euro area, not before. Again, the Euro is what has led to today’s problems by allowing the government to borrow at low rates, the exact opposite of what the country needs.

7. It is also absurd to suggest that a return to the drachma would save us, that will lift us out of recession. Instead, it would put us in a vicious cycle of inflation and devaluations situation.

The Euro is doing the exact same thing and the government attempts at reform are the exact opposite of what is required.

The Euro is the worst of all worlds. There is massive deflation which is normal but the cost of living is being maintained at the same level due to tax increases. At least with the Drachma the money in circulation could be increased to cover the extra costs. Hardly ideal but we see the alternative with the Euro.

Euro = Devaluation + Higher Taxes without Currency to Cover Costs

Drachma = Devaluation + Higher Taxes (inc Inflation) but with the money to cover the costs

Again, because the government is doing the opposite of what is normal, the Euro is the worst of all worlds.

8. that if not for radical reforms, our country has no future in the modern world of international competition.

This shows a complete ignorance of the Greek economy. The only problem Greece has is the Greek government and their taxes. It has always been the case and is getting worse under the Euro

Radical changes are needed but not in the private sector. The government needs to reveres their kamikaze measures and allow the economy to do what it would naturally, recover and grow.

If this means that the government credit rating dissolves, it will be a bonus, not a negative. Smaller government and smaller taxes are what is needed. Private sector reforms are not needed.

The government simply needs to start doing less and leave the private sector alone. It is very simple.

The Euro and the bailouts are simply keeping the government in business, prolonging the agony, enabling an alcoholic. The free market would ensure the government does the right thing.

People will say “but what about the pensioners and people who need benefits”

There is absolutely no need for these payments to be touched. The government takes in more than enough in revenues to pay pensions and benefits. This will not change with a government default.

What the government will need to do is to cut government departments that do nothing, ie government departments that the average person does not even know exists, for example

Department of agriculture

Department of tourism

Department of trade and industry and the list goes on and on.

Basically all of the government expenses are less important than benefits and pensions and yet it is the favoured manipulation tool of government throughout the world, threaten the pensioners, threaten people’s parents and grandparents.

If these departments are required then let local governments establish their own departments and pay for it with taxes from their area. A massive unaccountable bureaucracy in Athens is what led us to today’s crisis.

Of course all of these ideas and pie in the sky and will never come to fruition but at least we can stop pretending that the current course is the only course

It isnt.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s