Regrettably, the latest issue of The Economist has a cover story which prompted me to think that Master-Mind is telling Master-Race what to do. A devilish combination!
The Economist published The Merkel Memorandum. In it, the authors suggest that Angela Merkel would be imprudent not to consider Plan B; a plan which encompasses an orderly Euro-exit for Greece.
Master-Mind meets Master-Race!
The Memorandum is quite interesting. It incorporates ideas of Roger Bootle who recently won the Lord-Wolfson-Prize for the best proposal for a Greek Euro-exit. I mean, just the idea that some bored member of the House of Lords would get his kicks out of the idea, sort of between tea and port wine, to hand out a prize for the intellectual exercise of Euro-exit scenarios is worth pondering from a social science standpoint. Does he not have better things to do with his time and with his superior education? And with his inherited money?
If one were really interested in a constructive approach to a possible Greek Euro-exit, one wouldn’t have to go overboard and start a public competition for ideas. For a lot less money, one could take a flight to Buenos Aires and get the practical opinions of Argentines about an issue like that.
The sheer intellectual arrogance of this! Master-Mind is thinking what Master-Race should do. Who is at issue here? Master-Mind or Master-Race? Or, permit me the question, could it be that Greece is at issue here? Any idea what the Greeks would want to do or what’s best for Greece? Not in this article by The Economist for sure!
Intellectual superiority here or there. Have the Brits not taken a lesson from their past that they do not necessarily have the best track record when it comes to determining Greece’s future from tea rooms in White Hall?
I would suggest that if it ever came to a Euro-exit on the part of Greece, it should be absolutely irrelevant for the Greeks to consider what the effects might be in London, Paris, Brussel, Frankfurt or even NYC for that matter. The only thing which should matter to Greeks is what the effects are on Greece!
I mean, just the idea that one would sell as a top-story the breaking news that there should be such a thing as a Plan B! I would have thought that everyone from day 1 of the crisis (by that, I mean early 2010 and even before the first rescue package) would have had plans B, C, D etc. in his pocket before going to a meeting. That goes for EU-elites as well as for Greek leadership. Or could it be that they pursued a strategy of not even preparing for alternatives until those are forced upon them by force majeure? What would they have done if one day a giant bank run had started? (it still could!).
One major reason that we are where we are today is that, quite possibly, everone involved behaved a bit like well-meaning boyscouts: “We will save the Euro; period!”
Professionals, when in crises, go to meetings prepared. They have with them evaluations of all possible alternatives. When asked by journalists what the meeting will be about, they don’t make silly comments like: “We will save the Euro at all cost!” They matter-of-factly say to the press: “We have a crisis at our hands and we will evaluate all alternatives to get out of it. That could be a debt rescheduling; ongoing financing or even a Euro-exit. Any more questions?”
At issue here is (or should be!) what is best for Greece. If it is keeping Greece in the Euro, put a price tag to it from the Greek standpoint. If it is Greece’s leaving the Euro, put a price tag to that from the Greek standpoint. Evaluate the pro’s and con’s and take a decision.
Technically, a Euro-exit on the part of Greece is no rocket science: one declares a bank holiday for up to one week to get all the necessary legislation passed. Part of that legislation would be to convert all domestic contracts from Euro into a new Drachma at, say, 1:1 and to freeze bank deposits (with only minimal withdrawals for personal use).
There would only be a logistical problem: how to get new Drachma-cash into the hands of people but that should not be as complicated like planning a landing on Mars. If nothing else, one prints Drachma-checks for a while (there presently is a large market of post-dated checks in Greece).
Greece is presently dealing with a multitude of foreign currencies, like the British Pound, the USD and — the Euro. All a new Drachma would be is the introduction of a new local currency. The Euro would not disappear! Instead, it would remain one of the foreign currencies which continue to work as they have done before! If people want to continue dealing in a foreign currency like the Euro (perhaps because they have so much Euro-cash), let them do it! Argentines dealt with USD-cash even though the local currency was denominated in pesos.
As regards foreign currency obligations (like the foreign debt denominated in Euros), tough luck for those who hold it. Their borrower no longer has that currency. It now has a local currency instead. A local curreny which is rapidly devaluing and, thus, making those loans much more expensive. If Greece couldn’t repay those loans while having the Euro as a currency, it certainly won’t repay them with new Drachma! Don’t make a lot of fuss over it. Just write the loans off!
Allow me to ask the distinguished The Economist a final question: “Are you familiar with the expression of ‘self-fulfilling prophesies’? If yes, why do you engage in such questionable practices?”
Capital markets behave pro-cyclically. That is, they reinforce existing trends with their actions and decisions. Rating agencies do the same. One can now add The Economist to that distinguished group!