How to Fix Greece (and the EU): Part 2

In the previous post, we explained that Greece’s monetary problem is rooted in its fiscal problem which is in turn rooted in the Greek government receiving too many loans used for too much unproductive spending.

We then explained that austerity and high taxes are mercantile solutions which work well for businesses but not for society. If a business is in trouble, it can simply lay off or remove excess workers. But if a society or family is in trouble, it cannot remove its citizens or family members by forcing them to go overseas or to die from disease or suicide. Instead, society or family members naturally share the burden for the sake of the well-being of the collective, something that would not make sense among competing businesses.

European leaders

European countries are friends of each other, not merely customers

While we point the root cause to over-borrowing and over-lending, some have extended the root cause to the idea of a European Union itself. This is as nonsense as to say that since car crashes are ultimately caused by riding cars, then the best solution is to stop using cars. Some have attributed the cause mid-way, to the lack of fiscal enforcement within the EU, and so the long-term solution would be a fiscal union. This is similar to enforcing standardized road rules in our car example. We shall discuss this in later parts.

For now, we focus on solving Greece’s monetary and fiscal problems based on Adam Smith’s maxims.

MAIN SOLUTION 1: SOLVING THE LACK OF MONEY

“It is not because they are poor that their payments are irregular and uncertain, but because they are too eager to become excessively rich.” (Simple Wealth of Nations, Book 5)

The Greek government’s rush to become as rich as its EU friends caused it to ‘overtrade’ debt or to over-borrow, resulting in the lack of money. This ‘lack’ worsened its recession because government spending makes up a lot of Greece’s GDP.

Because of this, we shall split the first solution into a monetary part and a fiscal part.

SOLUTION 1A: SAVING EUROS THROUGH EURO-BARTER

“If gold and silver should fall short in a country which can buy them, there would be more expedients for supplying them than almost any other commodity. If the materials of manufacture are wanted, industry must stop. If provisions are wanted, the people must starve. But if metal money is wanted, barter will supply its place, though with much inconvenience.” (Simple Wealth of Nations, Book 4, Chap. 1)

The natural response to the shortage of money is to barter or to pawn real things for money or other real things. Nominal value can vanish, but real value always remains. In Greece’s case, though the nominal value of its government in the short term is small (for example, its remaining annual cash is not enough to pay annual pensions) and the nominal value of Greek society is small (its GDP and money supply has shrunk), the real value of Greece is still big as it is a developed economy. Greece should therefore pay its foreign debt in real value, or in kind, to stimulate its economy while reducing its debt. This solution is derived from the last chapter of The Wealth of Nations, after Smith explains the many ways the pernicious merchant-induced national debt can be reduced:

“It has been said that the Americans have no gold or silver money.. How is it possible to draw from them what they have not? It might be unnecessary to remit any part of the American revenue in gold and silver if it were remitted in bills drawn on and accepted by particular merchants or companies in Great Britain to whom some of America’s surplus produce was consigned. Those merchants and companies would pay into the treasury the American revenue in money after receiving the value of those goods. The whole business might frequently be transacted without exporting a single ounce of gold or silver from America.”

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To save precious Euros, Greece can pay its taxes in kind and use its exports (above) to offset its imports (below)

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Instead of the Greek government using its own precious euros to pay the debt, it could be paid by the euros of foreign merchants or businesses directly into the creditors. By paying its taxes in kind, such as in fruits, Greek production can be increased while giving more rude produce for the Germans either for selling or for further processing. $17 billion in exports to Europe can translate to $3.4 billion tax payments at 20% tax, all directly and immediately going to the creditors.

We then extend this idea and suggest that Greek imports from the EU worth $17 (out of $30) billion be paid by Greek exports to the EU worth $17 billion through a European clearing union. If successful, this can prevent the need for billions of Greek euros to be sent overseas to pay for imports, as only $13 billion will be needed. The saved euros can then be kept in Greek banks to keep them solvent and to pay wages and pensions, reducing the amount needed for the bailout, which in turn reduces the austerity needed.

Screenshot from 2015-04-20 12:06:13Screenshot from 2015-04-20 14:38:07

How It Works

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  1. A Greek exporter sends fruits out to a German retailer
  2. It registers the trade with the newly-formed European Clearing Union (ECU)
  3. While waiting for the payment, a Greek importer buys German cars
  4. The Greek importer also registers the trade with the ECU
  5. Before the Greek importer sends out cash to the German exporter (car maker), the ECU diverts the cash meant for the Greek exporter and sends it instead to German car maker.
  6. The ECU then directs the Greek importer to pay the Greek exporter, keeping the money inside the Greek banking system.

Although both the old way and this new way of payment will result in the same net amounts of cashflow, with this new way, Greece can theoretically keep its $17 billion worth of euros at all times, whereas in the old way, Greece can have zero euros for a certain time while waiting for their cash inflow from their exports. Although $17 billion worth of saved euros seems small compared to the current $370 billion debt and even the $16 billion dollars worth of euro interest payments, those values are based on a shrunk Greek economy.

Since the root of the whole problem is the lack of euros, the saving of such euros, by keeping them in Greece all the time, will enable Greek industry to pick up by conserving its life-blood. With this small but essential transfusion, the Greek economy can naturally circulate and accumulate it gradually to overcome the burdens imposed by the bailout.

NEXT SOLUTION: INCREASING THE MONEY

This solution tackles the lack of euros (monetary problem) in the Greek economy by reducing the outflow of euros. In the next post, we shall explain how Greece can increase its euros both for the general economy and for paying foreign debts (fiscal problem) so that the wealth of its nation can be increased.

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