The Greek crisis explained to my daughter

Why Greece will return to a local currency

Some party hack decreed that the people had lost the government's confidence and could only regain it with redoubled effort. If that is the case, wouldn't it be simpler if the government dissolved the people and elected another? Bertolt Brecht

21 June 2011

In blue, the common understanding of monetary issues.

Adoption of a European currency
A few years ago, the major European countries decided to have a common money. They set aside the currencies they each were using previously and instead dealt themselves euros. From then on Europe had a "single currency". Greece and other countries joined the group to create some sort of European federation. The operation each time is the same: Greece relinquished its drachmas and received an amount deemed equivalent of euros. Henceforth the country could buy goods and services anywhere in the "eurozone" with its euros.

They pooled all their banknotes?

Continued Greek budget and trade deficits
The Greek government, however, kept its economic policy which consisted in spending more than it received, and, in the past, printing drachmas. In fact it amounts to a fiscal and monetary policy where tax revenues are produced with the printing press. Some mediterranean or latin societies (Greece, Italy, Spain, Portugal, Argentina, etc.) prefer this to price stability, which has other advantages and drawbacks. The Greek government began to borrow euros. The big European lenders (Société Générale, Deutsche Bank, etc.) were more than happy to lend to Greece, because the interest rate was high, to take into account the risk, and they knew that Europe would refund them should Greece fail. Meanwhile Greece trade deficits continued as well. Greece paid its imports in part with exports (tourism, textile, ore, etc.), in part with promises, but in part with euros, which left the country.

What's the difference between a budget deficit and a trade deficit?

Threat of default
Now Greece is nearing defaulting on its foreign liabilities, and the State is also running out of euros for domestic expenses. Europe wonders what to do. There is much talking and haggling. Should we follow the liberal credo (let Greece go under, let's buy the Parthenon, the Piraeus like China all but did) or act as a community (but should we take control of the government of Greece). Angela Merkel opposes extending Greece further loans, Nicolas Sarkozy favors them, perhaps because France is not far from the situation of Greece.

We are getting closer to a default to whom?

What will happen next? - A local currency
The government began to reduce salaries of civil servants and pensions. More and more Greeks are running out of euros for their everyday expenditures, and therefore shops and local producers suffer as well. But this is not a problem: when in a community there is a dearth of monetary means (to facilitate production, exchange and consumption), we simply create some new ones. It becomes a "local money", something that States (or Europe in this case) disapprove strongly of, because money is one the pilars of State power. It happened in many places all over the world. I foresee that it will happen in Greece. The Greek government will begin to pay its civil servants and state pensioners with something that will be called a "temporary system of vouchers", and for convenience it will write on them "drachma". These will be usable to buy goods and services in Greece, and it will be forbidden to refuse them. And if the government doesn't do this, it is even conceivable that some private outfit do it.

How could a local entity possibly pay us? Where would its money come from?

The point of view of "experts", lenders and European officials
"Experts" are yelling: "Greece will leave the euro", "It's a catastrophe". They do not explain precisely why, and seem to prefer witnessing the economic activity of Greece decline, street riots burst and poverty set in but with a strict budgetary and fiscal policy within the eurozone, to seeing the revival of the Greek economy with a monetary policy adapted to the situation. Lenders are worried, for good reasons: there is a risk that they lose money on risky loans ; to be more explicit, there is a risk that the principle "your profits are yours, your losses will be taken care of by Europe" be no longer applied. And they are opposed to introducing a local money in Greece, officially "because we must pursue the construction of Europe, etc.", in truth because this local money, which would restart the Greek economy, would make it even more doubtful that international investors be repaid fully their 350 billion loan in euros. High ranking civil servants in Brussels and big countries are indignant: "We are unravelling the State (and our jobs)". Generally speaking, they look at the future with intellectual frameworks of the past (Nations-States, centralised governments, construction of a competitor to the United-States on this side of the ocean, and such like), in the same way in 1920 the big powers attempted to go back to the gold standard with the dire consequences of the 20's and 30's.

If we don't control our money, then who?

Money is a spontaneous social phenomenon
All these people forget that monetary phenomena are always and everywhere (to paraphrase a famous sentence) spontaneous social phenomena.

What does it mean?

What to think of the opinion of bankers
Bankers will tell you, my daughter, that these ideas are preposterous and impossible to implement, but don't let yourself be impressed. Over the past few years, these same bankers created the so-called subprime loans, repackaged them, sliced them, securitized them, and resold them to investors all over the world, and the latter finally incurred losses estimated by the IMF at four thousand billion dollars.

Who sustained the losses?

The future of Nations-States and money
My belief is that, in some future, Europe will be structured around smaller autonomous regions each with two currencies, one federal, the euro (or more likely a new currency managed by a private entity more responsible and trustworthy than States), and one local, each region its own. There will be a redistribution of responsabilities between regions and what remains of larger States. For instance in our country, France, education and welfare would certainly be better handled locally than nationally. And so is money used by individuals in their daily life. But all this is another story.

Will it still be possible to live at home?

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André Cabannes

course in advanced finance