And who is making a case for this now? After having, in previous posts, criticized him for belonging to those who only talk about the abstract financial economy and not about the real economy, I was very much (and positively!) surprised by the recent article of Mohamad El-Erian in the Huffington Post.
It is totally obvious that the Greek economy can’t work in the present Euro-structure because the strong Euro makes imports so cheap that it becomes less and less worthwhile to produce in Greece. However, this process works only as long as foreign funding is freely available to finance all of this, and such funding is coming to a halt.
To proclaim that “Greece must become competitive” is a wonderful slogan. However, it’s a bit like sending a talented but not yet fully developed Greek soccer player to Real Madrid and, once he has gotten used to the way of life there, telling him that he has to improve his game in order not to be kicked out of the team. “Becoming competitive” is a process which takes time; it cannot be mandated.
A return to the Drachma would automatically self-correct this situation: imports would go down, exports would go up, tourism would improve and — domestic economic activity would expand. However, there are those very negative consequences associated with a Grexit which have been discussed at length.
In consequence, if Greece can’t make it with the present Euro-structure but wishes to stay in the Eurozone, then it can indeed not avoid having to become more competitive; the question is how to get there. It’s sort of like being at “A” now and knowing that once one has reached “B”, everyting will be fine. But how can Greece get from “A” to “B”?
If it stays in the Eurozone, Greece must – during a transition period – simulate a situation as though it had returned to the Drachma: special taxes on imports with the objective of starting import substitution; Special Economic Zones for new production at internationally competitive terms, also for exports; and some form of capital controls to stop the drain of financial capital.
This will require temporary changes to the EU freedoms of free movement of goods and capital, but there is no way around it if Greece wants to stay in the Eurozone. Everyone says “the EU will never agree to that because other countries will cry foul play”. Well, include everyone else who is in a similar situation as Greece (i. e. the Southern Periphery) and you will soon find out that it is a lot cheaper to amend some treaties than to keep sending money.
Obviously, as domestic economies in the Periphery do more value creation on their own, they will need to import less. In consequence, current exporters to the Periphery will export less and have a bit less economic growth on their own. Perhaps they will cry foul play, too. Message to those: you can’t have the cake and eat it. Either keep sending your products to the Periphery or you let the Periphery do some value generation on its own. If you prefer the former, make sure that whenever you ship your exports you send the money along for payment.
To return to the example of the soccer player: delevop his talents; send him first from a local club to a regional club and then to a top national club and once he is a star there, then open the borders and let him fly to Madrid.