Euro versus Drachma: A Televised Debate

On December 12, 2011, the Greek TV station ‘SKAI’ broadcast a debate between seven Greek economists on whether Greece should stay with the Euro or switch to a new Drachma. The debate was aired a second time on December 15. Five of the participants were members of Greek Economists for Reform, with four supporting the Euro (Haliassos, Meghir, Pissarides, Vettas) and one supporting the Drachma (Azariadis). All of us were in favor of immediate, large-scale reforms to promote productivity and ultimately growth of the Greek economy. The other two participants (Lapavitsas and Skaperdas) supported unilateral default and switch to a new Drachma. The debate is in Greek without subtitles. You can watch Azariadis and Pissarides here and the studio debate here. Answers to the question ‘What is the first thing that should be done?’ here. Comments on the future of the economy here.

About M_Haliassos

Goethe University Frankfurt

This entry was posted in Banking and finance, Economic development, Europe, General, Macroeconomics, Product market, Public finance. Bookmark the permalink.

5 Responses to Euro versus Drachma: A Televised Debate

  1. Bibi says:

    your entire essay was a puke against the average Greek u should be ashamed of..
    corruption? ask Germany about that..
    German governments were bribing the Greek ex governments of PASOK to enter the eurozone although they were very well aware of the fact that Greece wasnt ready to enter..(so were some other states of the south..ex.Portugal)
    Germany did that to avoid paying up the WW2 compensations they owe to Greece and are estimated up to 575 billion dollars…the German historian of economy Albrecht Ritschl stated that if Germany is ever forced to pay its debt to Greece it will go bankruot immediately..Commiting crimes against humanity , murdering babies in their carriages and exterminating entire villages are supposed to be facts that should be forgotten according to u?

    Finally, me as a honest Greek citizen who pays her taxes and hates anarchy and acts of violence I WANT GREECE OUT OF THE EUROZONE and in for the drachma again…if Greece wont be given the ability to print its own currency , it will never escape the crisis …IMF and the european central bank know this yet they go on feeding Greece with loans…

  2. Kalimera says:

    Most of protests are Staged and very well Orchestrated, they pretend fighting but do not hurt each other. This is worth it to get hundreds of billions from EU. Greeks are very smart; the deception started with the Trojan Horse and is going on with very well orchestrated “PROTESTS” (with red flags, 2 by 2 bats, and of course fires that display flames but inflict no damage). If you want Greece to be paid off, for the Enormous Army, Universal Free Health Care, Lucrative Pensions, and Taxes that they never Pay, then you pay them by yourself, PAY THEM OFF, BY YOUR OWN POCKET.

  3. Here is a little tale about how Greece’s debt came to in existence in the first place.

  4. Thanasis Stengos says:

    The need for growth as a vehicle that would take Greece out of the current crisis is tautological. Yet, what is for debate and needs to be debated is how a country like Greece that has been suffering from serious structural problems in its recent and not so recent economic history can achieve growth. The debate about whether to remain or not in the euro zone is important, but it will remain academic unless there is a concerted effort (with the help of the EU in this case) to fight corruption. To do that most of the energy and effort has to be spent on reforming the judiciary. The rules of the game are such that whoever “screams the loudest” has better access to the media and the benefit of the judiciary system that is inherently incapable of ensuring a framework on which economic reforms can take place. Without contracts that are enforceable for all the parties involved, it will be futile to introduce reforms. The latter will be unravelled by the inability of the courts to enforce these contracts.

    For the new reality to become understood as something that requires new bold reforms to open up highly regulated markets and allow for productivity convergence between the public and private sectors, people need to be convinced that the rules of the game apply to all concerned. Until now as we speak, any attempt to bring individuals to justice who have either stolen public funds by not returning huge sums of collected VAT to the government, let alone the known income tax evaders, only results cases that are pushed into the future as these individuals are allowed to walk. The excuse here is that the judiciary is too overburdened to deal with these cases effectively and promptly. I am afraid that unless this government or any government deals with that aspect of the broken system, any reforms will never be implemented. To have any chance of success, let alone any chance to reach a climate for economic growth, there has to be a framework for enforcing contracts that is recognized and respected by all by imposing stiff penalties to all those who violate their side of the contract, whether public officials involved in corruption cases or entrepreneurs not returning the sums of VAT that they have collected on behalf of the government.

    One may counter, that Greece was growing until 2008 at reasonably healthy rates with the same judiciary and the same lack of contract enforceability system. Yet, even though we all recognize the reasons behind this consumption led growth engineered by easy credit, which led to the current crisis, it is the asymmetry between the upturn and downturn that obscured any need for reform. An expanding economic pie conferred benefits to all, even though these benefits also created “built in” destabilizers that now confront us all. I think, given the state of corruption as the result of lack of contract enforceability, the main reform that at this point that needs to take place, is the reform of the judiciary, for anything else to have any chance of success.

  5. I find the overall idea of defaulting and going back to the drachma a seriously aggressive external-policy assault towards our fellow European partners. There is high risk of starting a domino effect which may break the already fragile Euro system’s pillars.

    But even if a Greek default does not cause a Euro crisis, EU members will have been let down. Not only Greece would (and should) become politically isolated after such a move. One should not forget that public loans raised after the first memorandum in May 2010 are obtained through British-law terms. The IMF and EU member states would be able to seek justice in international courts in order to get these loans back (e.g., through confiscating Greek public wealth). Such a legitimate international-court case will contribute to making more enemies and for longer periods of time.

    But let’s stress something even more technical about such a scenario. What is our best guess? Will exchange-rate overshooting let the drachma stabilize at the rate of 600 or 1,500 drachmas per Euro after a few months? Or will Greece experience a vicious circle of hyperinflation? The credibility issue in Greece places the biggest probability weight on hyperinflation. Let me explain.

    The most crucial problem of Greece is its lack of credibility due to corruption. International markets have fully internalized that there are hardcore rent-seeking groups which act without any restraint. Corruption in Greece has four layers:

    1. Hardcore green or blue party members (hardcore members, not necessarily every voter of the two leading parties) seek appointments as civil servants with all the privileges this implies (tenure, free health insurance, pension, special family privileges, etc.). For more than 30 years these hardcore people could get exactly what they wanted, and they were willing to wait even for decades in their party’s list.

    2. Hardcore union members (hardcore members, not necessarily everyone who goes on strike), continuously threaten that, through strikes or even through violent protesting, they will take down the green party and bring back the blue party in power, and vice versa. Hardcore union members have a continuous opportunity to obtain rents in Greece, or at least to continue blocking professions they belong to.

    3. Voters and citizens who are not hardcore partisans observe persons in the above two categories and refuse to pay their taxes, since they know that paying taxes will feed the “beast” (not everyone is to blame for this, and tax evasion is a problem which is more structural than most outside Greece think). In addition, everyday people will end up begging the state for doing its minimal service, such as building roads, extending the city plan, etc. Unavoidably, this lack of social cooperation and responsibility caused by the collective feeling of the “beast’s” unfairness, leads to more corruption at the local-government level. The resulting prisoner’s-dilemma equilibrium and the resulting tragedy of the commons are known to every Greek citizen: excessive fiscal debt issuing.

    4. The most subtle, yet dangerous, layer of corruption is the established hypocrisy behind the public debate about corruption. Everyone complains about corruption in Greece, but it is difficult to tell apart a citizen who cares about bringing reforms from a citizen who is effectively a beggar, saying to the state “look at how much other are expropriating, give me something, too, otherwise I will not support you as a voter.” As a result, bureaucracy is intentionally enormous, most laws in Greece are intentionally complex, and their (non)implementation is at the service of pork-barrel politics. Finally, all this soup of corruption has evolved into having an enormous number of professional politicians in the parliament, some of whom have never excelled in anything constructive in their past professional life, politicians who have no ability even to understand the need for reforms, or any “to know how” about reforms.

    Nobody says (and nobody should think) that every Greek citizen is born corrupt. Yet, unfortunately, international markets have understood (at least intuitively) all of the above, and also that nobody can survive in Greece without bending state rules. This is what we should all be here for, to change this pitiful social life through drastic and radical reforms. But the lack of credibility described above, poses a serious constraint to any thought of going back to the drachma.

    Defaulting on bonds will simply lead most Greek commercial banks to bankruptcy (nobody in the EU would be eager to save Greek commercial banks, unlike what has been agreed on the 26th of October, 2011). If the Greek state handles the chaos resulting from an internal banking crisis successfully, then within a few days most Greek commercial banks will be nationalized. Experienced Greek rent-seeking groups will start complaining and violently ask for rents. The Greek government will issue bonds that can only be put forcefully inside nationalized Greek commercial banks. The central bank will have to swallow all newly issued bonds in order to guarantee the balance sheet of commercial banks, printing drachmas.

    The above mechanism is so well understood by incidents and observed practices in countries such as Argentina, Brazil, Turkey, etc., that experienced investing banks will bet on an enormous depreciation of the drachma, playing a key role to causing a self-fulfilling prophecy. Hyperinflation will simply cause more volatile economic and social conditions in Greece and chaos will be an almost sure outcome.

    In light of the above, I think a safe prediction is that if Greece somehow goes back to the drachma, it will end up cutting 6 zeros from prices every 2-3 years for about 10 years until a socioeconomic miracle happens.

    I really do not want to comment extensively on how harmful and disappointing I find that Greek economists publicly recommend a return to the drachma. In my humble opinion, it gives a terrible signal about what economists think and say, and about our understanding of Greece’s problems. Instead, we must acknowledge the serious corruption problem in Greece, which is part of an economist’s job.

    Instead of focusing on plain-vanilla current-account calculations with devalued drachmas, we must consider that with Brussels putting the Greek state under the microscope, there is long-term hope. There is no shock therapy for the corruption problem and an extensive politico-economic Greek crisis will not lead to any therapy of corruption. Externally forced fiscal transparency will lead to “killing the beast” described in points 1 and 2 above (not to be misunderstood: I do not mean to eradicate any unions or democratic parties, but the minority of the hardcore rent seekers). Once society internalizes that old rent-seeking practices are not possible for the next 30 years, I think that Greek citizens will start welcoming reforms instead of being suspicious about each and every new reform idea discussed nowadays.

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