BUT: Argentina devalued (which Greece cannot do with the Euro). And Argentina taxed imports (which Greece could do, albeit only with a change in EU-treaties).
The common currency, the Euro, requires Greece to compete with Germany hands-on. Germany’s productivity is substantially higher than that of Greece. As a result, Greece could only compete with Germany successfully if she were substantially cheaper than Germany to compensate for the difference in productivity. Instead, Greece has become more expensive relative to Germany since the Euro (higher inflation).
Greece’s Euro has the same international purchasing power as Germany’s Euro. Consequently, if Greece’s own production is more expensive than that of Germany, she is better off to import goods from Germany instead of producing them on her own. This presupposes that someone lends Greece the money to do that. The Germans did (among many others).
Picture the consequences for Greece of an exit from the Euro. The new Drachmae would not nearly have the same international purchasing power as the former Euro. Greeks simply could not afford to import as much as they have been importing with the Euro. Thus, Greeks would have to start thinking how they can substitute for some of those imports through domestic production. Greece would require less financing from abroad (because she would buy less imports) and she would stimulate domestic economic activity through the production of import substitution.
If a Euro-exit would solve the problem, why not do it? Because it would have many, many other – mostly unforeseeable – negative consequences for Greece and for the EU. It could be done, of course, but does anyone really want to take chances?
Now let me add up one-and-one: if a Euro-exit is the worst evil and if Greece cannot be competitive with the present Euro-structure, wouldn’t the obvious solution be to hold on to the Euro but simulate a situation as though Greece had returned to the Drachmae?
Greece has to tax imports in such a way that imports in sum become so much more expensive as they would if Greece exited the Euro (30-50%). The most necessary imports should not be taxed at all. Luxury imports should be taxed at 100%.
New production for import substitution does not happen efficiently in the present corrupt and crony-driven economy. Above all, new production requires new investment and only a fool would invest in the present corrupt and crony-driven Greek economy.
Let me, again, add one-and-one: if new domestic production is necessary (and, above all, if there is demand for new domestic products!) but if new domestic production cannot happen efficiently in the present corrupt and crony-driven economy and if new investment capital could not be found for these reasons, wouldn’t the obvious solution be to create “pockets” in the Greek economy where new capital can work efficiently? What would be such “pockets”? For example, selective Free Trade Zones (to start with: one in the area of Greater Athens and another one in the area of Greater Thessaloniki) where a new Investment Law assures the investor the security and the economic framework which he desires.
It appears that presently no one trusts Greek lawmakers. Investors might say “forget the new Investment Law; they will break it as soon as they want to”.
Let me, again, add one-and-one: if investors do not trust the Greek lawmakers, why not have a third party outside Greece guarantee the new Investment Law? Who could that third party be? Well, remember, Greece is a member of the EU and the EU considers itself as a “solidarity community”. This would be a wonderful time to call on EU-solidarity to guarantee compliance with the new Greek Investment Law.
Everyone knows that Greece’s economic upper class is phenomenally wealthy. Some of that wealth can be seen in Greece directly; most of it is in bank accounts offshore. And everyone knows that Greeks are good businessmen who know how to take advantage of a good business opportunity.
Suppose you were a Greek with, say, 20-30 million EUR in Swiss bank accounts which earn you presently 2% at best. You now see the opportunity to invest, say, 5 million EUR (under an Investment Law guaranteed by the EU!) in the Free Trade Zone around Athens for the production of, say, toothpaste and the business plan suggests that, if you do it right, you would earn 10% on your investment. Suppose all toothpaste so far has been imported from Germany because the German toothpaste cost 1 EUR per tube whereas the cost of toothpaste produced in Greece would be 2 EUR per tube. Under the new Investment Law, you can produce the same tube also for 1 EUR and make the profit according to the business plan. And for some time you have protection to build up your business because the government is taxing imported toothpaste at 100% so that they now cost 2 EUR per tube in Greece.
Now the “normal Greek businessmen” might immediately say “if the imported toothpaste costs 2 EUR per tube, then I will sell mine at 1,99 EUR, produce it cheaply under the new Investment Law and make tons of profits”.
Sorry, dear “normal Greek businessmen”; this ain’t how the system can work successfully on a sustained basis. Your benchmark has to be the “internationally competitive price”. The government assures you that you can produce profitably at internationally competitive prices. It even assures you that you have some protection during the start-up period. But the system is designed to re-industrialize the Greek economy and not for you to pull a fast one.
There would have to be public tenders for new investment projects and there would have to be sound business plans, compliance with which would have to be supervised by reputable external auditors. Anything that only smells of the “Greek way of doing business” (tax cheating, bribes, etc.) would have to be strictly prohibited. Perhaps even the EU should be given the right to make sure that the new Investment Law is implemented properly.
Who knows? If these Free Trade Zones are successful, they might manage to produce internationally competitive products which can be exported!!! And the successful system of the Free Trade Zones might even rub off on the rest of the economy!!!
Now there are 2 other “little things” which have to be managed seriously: capital flight and tax collection.
Dear Greeks, you know that if you have money in your Greek bank account, you can walk over to the bank any time during office hours and order a transfer of those funds to your private account in Switzerland. You may not know that your bank needs to borrow from the ECB the money which it transfers on your behalf. The ECB represents tax payers’ money. So, do you think it makes sense for European tax payers to give your bank the money which it needs so that you can transfer your money to Switzerland? Be honest with yourself; it doesn’t make sense at all!!!
Because of that, you should understand that the government will now control capital outflows in such a manner that anything which represents a transfer of Greek wealth offshore is prohibited (or taxed at high rates).
And, finally, the national past-time of tax evasion.
Dear Greeks, do you know that if your government had proportionally the same revenue base as the government of, say, Austria has, your government would even today have a balanced budget? That it wouldn’t have to make further drastic cost-cutting measures? (“proportional revenue base” is total government revenues as percentage of GNP).
You know that and because you know that, you should have no objections when the government starts implementing some real harsh tax collection measures. What kind of measures? Lookhere.
Do all of the above and you will happily live ever hereafter!