If Scotland, why not Greece?

Why an independent Scotland should get out of sterling, but Greece should not volunteer to exit the Eurozone

Bank of Scotland NoteScotland should state its intention to decouple from sterling, once independent, rather than petitioning for a continuation of its subservient role in an asymmetrical sterling union. Or so I argued in the Scottish Times in ‘Scotland Must Be Braver’ (28th November 2013). But if this is good advice for Scotland, why am I arguing that Greece should not sever its links with the even more odious monetary union known as the Eurozone? Unless the two cases differ, my argument lacks consistency. But they do differ. Fundamentally too.

Why should Greece not exit the Eurozone?

The main reason is that there are no Greek banknotes either in circulation or in storage. Any decision to exit from the Eurozone will be accompanied by a weeklong bank closure during which euro notes will be marked manually (e.g. with indelible ink) to differentiate them from euros and brand them as New Drachmas (NDs), until freshly minted NDs circulate many months later.

Even before the prolonged ‘bank holiday’ begins, the ATMs will have run dry and will remain so for a while (as the banks will not have the authority to dispense euros any more). In the meantime, Greeks with hoarded cash will try to take it out of the country, to prevent their stamping and devaluation. Liquidity will thus disappear. Meanwhile, strict capital controls will re-appear and the Schengen Treaty provisions will be suspended indefinitely, since every bag and every suitcase leaving an airport, a port, or a land border will have to be checked by armed police.[1] And when the banks re-open, long queues of angry depositors will form outside seeking to withdraw their stamped euro notes with a view to trading them as soon as possible for unstamped ones (or for other currencies) based on a self-confirming expectation that the NDs’ exchange rate will fall and fall and fall…

In summary, a Greek exit from the Eurozone will trigger a week-long bank closure, the rapid loss of liquidity for the already fragile private sector, a subsequent bank run upon the banks’ re-opening, an instant exodus of cash savings, and Greece’s loss of one of the European Union’s few achievements: unimpeded movement within the EU. It will also mean that the Athens government will no longer be in a position to negotiate a write-down of its debt with the EU and the IMF (appr. €280 billion), as a de facto default on its euro-denominated debt will be unavoidable. The economic impact of these developments will be, undeniably, shattering.

Might the political benefits outweigh the economic cost? While it is true that, presently, Greece resembles an occupied nation, and is ruled over by a Berlin-directed troika of bailiffs, it is important to recall that this state of affairs is not cast in iron and would disappear in a puff of smoke if Italy, Spain, Greece, Portugal etc. were to form an alliance to demand different policies. In sharp contrast, Scotland will always be dominated by England within the sterling zone, courtesy of a permanently demographically lopsided two-member union.

Why should Scotland issue its own currency?

English Euro-sceptics were right to lambast the Eurozone, only they did so for the wrong reasons. Caught up in their Burkean narrative, they argue that money must be issued and controlled by a state whose authority is sourced in a single nation, exuding collective sentiments and evolved conventions reflecting a shared national history. The euro’s problem, according to this view, is that there is no nation-state to back it up (correct) and that no European institutions can/should develop to play that role (incorrect).

What England’s governing Euro-sceptics seem to miss is that, if no currency can serve the interests of a multi-national state, then either Scotland should issue its own currency forthwith or the Scots do not qualify as a bona fide nation. The SNP’s decision to ‘demand’ the continuation of the sterling union is a missed opportunity to turn the Burkean argument against Mr Cameron and his merry Englishmen. To say to him: “If you are right about the Eurozone, then we have a moral duty to make Scotland independent of London and immediately to issue a Scottish currency. Unless, of course, Mr Cameron you do not think that the Scots are a ‘legit’ nation. Which of the two is it David?”

Further to the political argument for a new Scottish currency, there are formidable economic arguments in its favour; arguments that do not obtain in Greece’s case.

First and foremost, Scotland, unlike Greece, has its own banknotes. This may well be an historical curiosity but, nonetheless, it could prove hugely beneficial for an independent Scotland. Presently, three Scottish banks issue Scottish pounds under an agreement with the Bank of England which limits the quantity of printed money.[2] Upon independence, the Scottish government can commit to maintaining (say, for two years) the same rules except that the control of the three banks’ note issues is transferred to a Scottish Central Bank which commits to maintaining a currency board that allows for a seamless transition to a free-floating Scottish pound (within two years). Unlike in the case of a Greek abandonment of the euro, in Scotland there need be no bank closures (as the Scottish notes are already in circulation), no ATM disruption, no re-writing of short and medium term contracts and no fear of bank runs. Indeed, the currency in people’s wallets will be exactly the same as now.

Turning to the issue of public debt, another difference with Greece (which will default de facto the moment it leaves the Eurozone) is that Scotland does not have a public debt. Or, to be precise, it will have whatever debt it inherits from the United Kingdom as a result of a post-referendum negotiated settlement between London and Edinburgh. The SNP’s misguided commitment to staying within the sterling union is forcing Mr Alex Salmond to sacrifice the debt issue, using it as a bargaining chip for securing the continuation of a lopsided currency union (rather than issuing a new currency in order to minimise the amount of UK debt shouldered by an independent Scotland).

In ‘Scotland must be braver’ I outlined the broader argument (which I shall not repeat here) that a shared Bank of England[3] will always favour monetary policies:

  • attuned to the needs of southern England and the City of London
  • operating as a perpetual drag on Scottish growth
  • posing a permanent threat to the solvency of the Scottish government.

Undoubtedly, these asymmetries afflict not only Scotland (under a sterling union) but also Greece and other European nations (within the Eurozone). But here is the crucial difference: the Eurozone asymmetries are not built indelibly into the union’s demographics (as they are in Scotland’s position within the United Kingdom) and can be reversed if the Periphery gets its act together.


Scotland is not Greece. It is contending neither with a humanitarian crisis nor with an upsurge of Nazism. The case of ending its monetary union with its more powerful partner is, in this sense, less pressing that Greece’s need to re-negotiate its far more toxic monetary marriage with Berlin and Frankfurt. So, why am I arguing that Scotland should exit its monetary union but Greece should not?

The reason is twofold. By exiting the sterling zone, Scotland stands to gain nationhood without suffering any of the catastrophic economic costs that Greece would sustain following a unilateral exit from the Eurozone. Greece can reclaim its sovereignty within the Eurozone by finding the courage to challenge the faulty logic of its loan agreement with Brussels, Berlin and Frankfurt. Scotland, in contrast, can never secure sovereignty within the sterling zone because a shared central bank will always force Edinburgh to dance to the tunes of the City and of England’s South East. As Mrs Thatcher famously said in her final appearance as Prime Minster in the House of Commons: “It’s all politics. Who controls interest rates is political!” In the sterling zone, unlike in the Eurozone, the controller of interest rates is pre-determined and unchangeable: London!

Listening to unionists speak of an independent Scotland confirms their patronising view that Scotland is, axiomatically, (a) better off within the United Kingdom, and (b) a permanent beneficiary of (and a fiscal drag on) a benevolent, richer England. Underlying this prejudice lies the unstated belief that the Scots are no longer a viable nation; that they have been assimilated by England; and, thus, that a common UK currency is ‘natural’ (unlike the euro) because it is used by a more-or-less homogenous English-dominated population, with some regional folkloric variations on its Celtic ‘fringes’.

This colonial view is what the people of Scotland have a golden opportunity to reject in the forthcoming referendum. Unfortunately, the SNP has undermined the referendum’s capacity to denounce the denigration of the Scottish nation’s integrity by clinging onto a sterling union that, according to Mrs Thatcher’s logic, surrenders Scottish sovereignty back to London even before it has been won.

  • Instead of organising Scottish public opinion against the idea of perpetual monetary dependence on an England that turned away long ago from the social contract tradition that most Scots hold dear, Mr Salmond is tying his colours on the mast of an unreformable Bank of England.
  • Instead of making a virtue out of the prospect that an independent Scotland will not rely on a large, destabilising financial sector, the SNP is arguing that the sterling union must be preserved so that Edinburgh competes with the City as a… financial centre.

I can think of no better ‘strategy’ than the SNP’s commitment to sterling if its aim is to lose the referendum and to alienate those Scots who want to vote with pride for an independent Scotland that seeks a path radically different to the one England embarked upon in 1979.

Returning briefly to the comparison central to this article, Greece’s radical move for re-establishing its sovereignty (a move equivalent to Scotland’s withdrawal from sterling) is not to exit the Eurozone but to veto the terms and conditions of its ‘bailout’ agreement and to demand new policies from the existing institutions. The risk of such a bold strategy is that the European Central Bank may receive the green light from Berlin to cut Greek banks off central bank liquidity. This would precipitate not only a Greek exit but most likely a wholesale disintegration of the Eurozone as well. “Let them do their worst”, I say in this case, even though I am convinced they will not dare.

A sensible Greek demand for re-thinking the euro’s awful architecture is more likely to act as the catalyst Europe needs to hold the rational debate that it has steadfastly refused to have. In this debate, an independent Scotland, with its own currency guaranteeing its autonomy from Euro-sceptic England, can help an emerging alliance of peripheral European countries establish a new Eurozone architecture; perhaps even one that Edinburgh may want to join…


[1] Something similar happened in Cyprus when capital controls were introduced there. The difference is that Greece has a land border which makes the controls next to impossible to impose.

[2] The Bank of England presently issues £1 million notes (Giants) and £100 million notes (Titans) which are held somewhere on its Threadneedle Street premises permanently. The three Scottish pound issuers are, simultaneously, authorised to print Scottish pounds of the same face value.

[3] Even, that is, if London were to accept the SNP’s demand to share the Bank of England with an independent Scotland.

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  • Intriguing article. Are you implying that if Greece were to solve the technical in nature issue of availability of adequate new banknotes on the spot then a New Drachma regime could be feasible ? Then perhaps we thus can finally initiate a different debate than the new Eurozone architecture one; the debate of the pros and cos of the New Drachma. Thank you.

    • IMHO what he is implying is that if “Greece were to solve the technical in nature issue of availability of adequate new banknotes on the spot” AND also write the debt down in cooperation with the other european gvts, only then a return to our sovereign currency would be feasible.Let’s not forget that the debt we have accumulated since 2010 is under English Law.

      A default on it would not be in our favor whereas debt under Greek Law would bear nearly no consequences.

      It would make no sense to return to drachma while the debt is nor redenominated neither (voluntarily) written down.

    • We are in total agreement as far as the theoretical necessary conditions to a multilaterally coordinated return to drachma. However my call for a public debate is not to investigate an amicable reconstruction of our debt.

      As the lenders will refuse to substantially write down/and or re denominate the debt as I believe it is merely wishful thinking to expect any kind of meaningful corporation from the governments engaging in this most “sinister experiment” the
      only combination that we are left with (but I understand highly improbable) in my opinion is to Return to drachma and Default at the same time. The only real consequence of a such default governed by English law on a sovereignty will be that Greece will never be able to borrow again from the markets it defaulted in.

      And that’s the public debate that I believe has been missing. What are the pros and cons of this combination of returning to drachma and defaulting.

      Preconditioned that we solve the technical issues. A myriad of issues beg fir investigation such as wether the economy can sustain surpluses under this combination and avoid severe side reflects such as stagflation ?

      What are the real legal consequences if a default of a sovereignty ?

      A gentle reminder here that several defaults of Latin America countries were on debt issued under the jurisdiction of the UK and the consequences were but even close as many wants to believe they will be.

      What’s the Minotaur saying ?

    • @Crossover
      But it would make even less sense to renominate the Greek debt to drachma, while Greece has the Euro 🙂 Thus, Euro lock-in…

      I see the renomination of the debt as one possible form of “haircut deal”, to be achieved after Greece returns to drachma and defaults.

    • @Vasilis

      Obviously what I mean is, it makes no sense to return to the drachma unless PRIOR to the grexit, there’s a clear deal between Greece and the counterparties on the fate of the debt that dictates that it is either redenominated or written down or a combination.

    • We should only exit if we have assurances as to what happens with the debt once we exit.That’s my point.
      Repeating it cause I figured I may have not explained it clearly even on my previous post lol.

    • @Buddha

      ” The only real consequence of a such default governed by English law on a sovereignty will be that Greece will never be able to borrow again from the markets it defaulted in.

      And that’s the public debate that I believe has been missing. What are the pros and cons of this combination of returning to drachma and defaulting.”

      From a purely economic perspective and if I take your word that the only consequence of a default on debt under English Law would be an exclusion from the markets, then Greece has nothing to worry about as long as it does not (and it should not) have to borrow foreign currencies.It would not need any markets in order to acquire the currency it issues itself.No country needs them for that matter.

      But if you want to do a reality check then let’s agree that a purely economic perspective hardly adds to the discussion of a problem that is first and foremost political and as such requires political solutions.It is a political decision that eurozone countries should have their bond yields dictated by the markets. It is a political decision that the ECB cannot purchase bonds on the 2ndary market with no strings attached.The 3% of gdp deficit and 60% of gdp debt limits are also products of political decisions while making little to no economic sense.Τhere’s no economic reality (that is stripped off of political agendas) that gives sense to this nonesense.The economic tools are there to end the problem yesterday but this requires a political decision too.

      Having said all that, I repeat that from a purely economic perspective it would make little to no sense to worry about the markets should we return to drachma and with our debt written down.
      My only question is, are the (non existent) economic consequences the only thing we would have to worry about in your scenario?Are we prepared for anything else?

      In my eyes it is a bit far fetched to promote an all out head-on clash with Europe while we have a government that does not even TRY to loose as less as possible on behalf of the country and does not even try to exploit opportunistic situations that can be in our favor (e.g. coalition with the IMF re. debt sustainability).

    • I agree with you it’s far fetched. And yes we are not yet prepared for an all out confrontation. First of all that will require a complete engagement of all our powers and strengths. It will require that we all unify behind this purpose. One of our biggest short comes in fact.

      I also agree with your point that a political solution is what is the preferred outcome here.

      However I am afraid that we will not get that. The relevant parties’ agenda is not to find a solution to our problem.

      I agree with Yiannis that this whole exercise in Greece has been a blatant attempt to transfer banking losses to the general masses.

      Most importantly I am convinced that we are looking at one or two generations lost in Greece. Given all that is going on and confronting in fact colliding with all these forces maybe the only possible play we have. Alternatively we could sit back and watch the next two generations burn.

      Please allow me to clarify I am not declaring that not honoring our national obligations is morally justified because of the lenders inner motives. In fact I personally believe we are mostly to blame for all this mess. However at this point we need to explore the possibility of an all out collision. Maybe our inquiry will show that we have the least to loose in this game. Just maybe we should explore that if that is the case.

    • @Crossover
      I understood that, thus the smiley 🙂

      But I do not see why it has to be agreed beforehand, not to mention the practical impossibility of starting such a negotiation, without the banking system collapsing on the first whiff that such talks are taking place…

    • @Vasilis

      You are right regarding the panic that such negotiations would bring to the banking system.But so would any discussions of grexit (as they did up to an extent these last years).But I assume that you expect the exit (and the preparations for it) to take place on the low, without any previous notice.The same can and must happen for what I am proposing.

      Why it has to be agreed beforehand? Because failing to do so – agreeing on a form of restructuring, would cancel the benefits of a return to drachma and make things even worse.

  • Scottish pounds may be legal tender but even now are nigh on impossible to use in England. Traders will accept them if pushed but they don’t have to. If Scotland votes YES and is no longer part of the Union do you really think the above situation will change fir the better?

    And what happens if they or England reject their use of Sterling? They won’t immediately be welcomed into the Eurozone and would the Euro (simply another word for the Deutschmark) help a fledgling nation? So, they go it alone with the ‘Scottish Pound’ and within hours the markets realise they can make money by trashing this new currency. Within days a Scottish pound would be worth 30% less than the English pound.

    Companies would move south in their swathes e.g. Standard Life, BP etc and jobs would be lost.

    And then there is the question of national debt. The UK tax payer’s monies spent on banks was primarily on Scottish Banks i.e. HBOS, RBS, and in part Lloyds (TSB). If Scotland want the North Sea Oil (they need the oil because 30% of households in their largest city (Glasgow) do not have anyone earning / working) then will it be divided geographically, by population or by where the billions of pounds of investment originated from? If, as Salmond wants, it’s geographical then the English Government might say fine but the three Scottish banks are based / have their HQ in Edinburgh so Scotland owes England £100 billion for the 2008 bank rescue package. If the Oil is divided by population then can Scotland survive as an Independent entity with only 10% of the revenues and zero money from Westminster. Remember, the Barnett Formula means the Scots currently get more tax payer’s money per capita than the English.

    And one more thing whilst you have a go at ‘David’ you should perhaps remember that If Scotland votes YES then there will be 70 less Scottish MPs in the House of Commons. Around 59 of those MPs are Labour. Miliband currently has 290 Labour MPs so Cameron and the Torys would be far better off if Scotland did vote YES.

  • This post was long overdue but sadly in my opinion the reasons presented here in favor of Greece staying put in the Eurozone are inadequate. You present as your main argument mere technicalities. While the course of action of a sudden exit from the eurozone would probably follow the lines you described this is not the only option. There is also the option of a gradual re-introduction of the new currency in parallel to the euro. Greece in its dire condition I might add is a very good candidate for this course of action. Why? Well because of its significant outstanding public debt to various contractors and the huge outstanding private tax debt (to the tune of close to 60bil euros!). The Greek government can use these two accounts to pump the new currency in the economy controlling supply and demand at the same time as well as introduce an exchange market for the new currency. This is much preferable to a sudden shocking change in currency value during the course of a weekend. One might argue that the economy would be in limbo for several months. Well, the economy is in a coma now as you probably know, so a few more months would not make any difference. Capital controls of course would have to be immediately introduced to safeguard the euro deposits in the country that would be now regarded as valuable reserve foreign currency. This is the only issue of importance and it would have to be negotiated along with the inevitable restructuring of Greece’s external debt with the ECB and the eurogroup. You also cite as a good reason the hope that a united front of Southern periphery countries would be able to force the implementation of the necessary policies for the transformation of the eurozone into something more viable. I seriously doubt it, there were plenty of chances for that these past years and I expect that this would be a top priority in every Greek, Portuguese, Italian etc. politicians mind as well. The fact that it did not happen proves that the eurocrats in Brussels have a tight hold of these countries elites and therefore the political machine. The only chance is a regime change in these countries, meaning a complete eviction of the corrupt systematic ruling parties. Then and only then could the option of following a course of action that would benefit our national interest would present itself, as well as the option of establishing alliances. All in all, I think that there are options on the table and it would be beneficial for everyone involved in this euro-mess to start a debate. Certainly Greece and its public would benefit from it since it is incomprehensible for an issue of such significance and the source of all our recent misery to remain taboo.

    • This would not solve the debt problem at all.
      A return to the drachma with the outstanding debt, remaining as is (no write off no redenomination in the new currency) is one step closer to Weimar Republic.

    • What’s this obsession with debt? I really don’t get it. Right now the big issues are the completely broken Greek banking system, Greece’s year long deflation and the fact that the euro at a rate of close to 1.4 to the dollar is way too expensive for its economy and wrecking any chance of survival within the EZ. Greece will have to restructure its debt one way or another regardless its place in the EZ. Even the official memorandum narrative pretty much acknowledges this. The official memorandum numbers for 2014 are demanding a primary surplus close to 4,5% of GDP. That is completely ridiculous and out of the question. The only real issue with Greece’s debt is the fact that it now is primarily external and thus it deprives the economy of necessary funding in order to service it. It is a mess any way you see it and there is not an easy way out. In any case the fact is that Greece’s debt is not viable and naturally any discussion concerning a possible exit from the EZ will have to include a complete or partial debt conversion into the new currency. The debt’s current legal stature is also irrelevant; no matter the fine print reality dictates that it will never be paid back to its full amount. Can’t pay, won’t pay that’s what I say and there is nothing any court on earth can do about that.

    • @Tasos

      You would only call it an obsession long as you don’t see a difference between debt payable in foreign currency and debt payable in domestic sovereign currency freely issued by the public.
      Nevertheless I am afraid there is a huge difference between the two.As a matter of fact this distinction is even more important than the distinction between externally or internally owed debt.
      For once, even if Greece DID have the euros (on which btw it has no issuance privilege) to service its debt which for the sake of the argument let’s assume was almost totally domestically held, these bondholders could very well take their euros and spend them elsewhere in the Eurozone.

      On the other hand if it issued its own currency and had debt denominated in that currency, 1st it would be impossible to be unable to service said debt (90’s anyone? Debt/Gdp was almost near the levels of 2010 and with even higher nominal and real rates) and 2nd whether the bondholders were residing in Greece or abroad would be irrelevant.Their earnings from coupon and principal payments would by definition have to be spent in Greece, a fact that along with the fluctuation of the fx rate would act as a stabilizer for the trade deficit.
      But what if Greece returns to drachma and the debt remains in euros ?How far would we be from Weimar in that case?

      As for the legal stature, I beg to differ.
      I am no lawyer but there has to be a reason that the new debt is under English Law.
      I’ve yet to read a scientific view on the importance of the law that governs the debt but that’s my feeling.

    • @Crossover
      I agree with you that public debt denominated in euros is a different proposition than if it is denominated in drachma. But note that your argument (if I may summarize it as “euro-denominated public debt is a recipe for Weimar-like conditions in the economy”) is true today, with Greece in the EZ and the euro, and in fact true for every EZ country! It is exactly the Weimar dynamic that developed (because profits can move freely across the EZ whereas losses/risks remain “nationalized”) that has disintegrated the EZ. As long as there is no surplus recyling in the EZ, this is a recipe for disaster.

      On the other hand, observe that as long as Greece is in the EZ, the same Weimar-like dynamic applies to private debt as well, to the extent that it is funded by foreign capital! Furthermore, private debt is much less manageable than public debt. Thus, a return to a national currency is essentially a (much needed) haircut on private debt (which also includes deposits! they are banks’ debt to depositors).

      I believe this “let us worry first about private debt” is what Tasos means by saying “who cares about public debt”.

      The tragedy is that, although Yannis is fundamentally correct–his MP and like policies is the only sane, decent thing–societies cannot afford the time it will take to enlighten the EZ elites and core country populations. He is also correct that before Grexit (or Itexit or Spexit or whatever) a confrontation has to come to attempted, that much is needed.

      Where he is terribly wrong, is to expect that this confrontation is going to happen while the population is terrorized of the prospect of leaving the euro; it won’t happen, because no politician will have the guts to pursue it.

      PS. As I am writing these lines I am listening to a political debate on TV re. the Greek crisis. Delusion and misinformation abounds…

    • @Vasilis

      The measures imposed by the allies on Weimar is as of now the only part of the Weimar story that resembles our situation today.The other part is the collapse of the currency.Ofcourse for the biggest part, currency collapse was a result of productive capacity destruction and reckless money printing for wages at a time when even those that still participated in what was left of production were on continuous strikes.But there was also the contribution of the fact that debt owed to the allies was payable in foreign currency.

      And that was what I was hinting by mentioning Weimar.
      Attempting to service the debt in euros will send the exchange rate to the bottom unless we’re going to have an industrial revolution vol.2 and productivity goes sky high.
      This also explains my insistance on securing a debt restructuring deal as a prerequisite for a return to drachma.

    • @Crossover

      Ah I see, you are worried about hyperinflation under the drachma.
      Well, I was referring to the period of Bruning (right after 1929, until Hitler), the period which later became the model for Fisher’s theory of debt-deflation.
      Much more devastating than the hyperinflation bout, it destroyed German society and led Hitler to power in short order.

      It would be an interesting discussion, but let me tell you: I would take hyperinflation over debt-deflation any day. Maybe we shall have this discussion one day.

    • Vasilis don’t get me wrong.
      I spend most of my time in this blog trying to convince people that it’s not that easy to have hyperinflation Zimbabwe style.It takes several conditions to coexist for this to happen.And I would definitely prefer the double digit inflation of the 80’s and early 90’s over the low and now negative inflation since 08 considering the contrast of the quality of life between these 2 periods.

      Nevertheless I would like to see Greece first extinguishing all its efforts and chances of getting a solution inside the Euro (or out of it given the pre-requisite i have mentioned) before declaring that I would prefer Greece with the drachma in the hands of these idiots and their Euro-debt as a souvenir.
      And so far I’m afraid i’ve seen no efforts from Greece in this direction.

    • @Vasilis
      You are spot on with “let us worry first about private debt”, I agree with that 100%. I also agree with your assessment on post 1929 deflation phase Weimar Germany’s economics. It was this devastating period that delivered the country to Hitler, not hyperinflation that it could be argued had a mixed result in Germany’s economy benefiting some (industrialists, everyone that had taken up loans etc.) and it has been argued that it was the result of a partly purposeful attempt that involved the government and the reichsbank to drive the economy over the edge in order to avoid paying the Versailles’s treaty reparations.
      @ Crossover
      I agree that the ideal scenario would feature a debt write-down or a debt conversion, it’s just that in order to force something like that an exit from the EZ would have to be taken for granted. There is no way the debt would be settled once and for all within the EZ, it will be held as a bargaining chip in perpetuity as long as Greece stays in. In my opinion Greece should focus on how to recapitalize the banks properly or bargain for a meaningful growth aid package instead on focusing on the Debt issue. These are issues worth bargaining for, alas Greece continues to waste valuable political and economical capital focusing on an issue that even if it were solved yesterday it would not make any difference now to its economy. Remember that Greek banks do not hold any bonds anymore and will not be able to take part in any new auctions unless they are properly recapitalized.

      Beside, these points and having enjoyed the discussion so far I would like to point out something that hasn’t come up: Does Greece and its economy stand any chance of survival in the EZ at a time that the EUR/USD parity is close to 1,4? I would leave it open for debate, but in my opinion no, it doesn’t stand a chance in Hell.

  • Dear Yanni,
    re your argument against Greece introducing a drachma, frankly, I find it impossible to believe that the reasons you mention in this article are the full extent of your concerns with Grexit. I believe you still choose to keep some things unsaid.

    Surprisingly (or maybe not) nobody seems to mention the following two motives of the Greek elite for keeping the country in the EZ—the only reasons that I can think of, that ring true:
    (a) Wealthy individuals and corporations are unwilling to give up the privilege they gained under the Euro, to be able to spend or invest abroad the income earned in Greece. Indeed, since 2002 when they acquired this priviledge, the wealthy and corporations massively exported capital (esp. banks and big corporations–even state-owned) and wealth (individuals), investing everywhere but in the country. Many are so averse to losing this privilege that the sight of a collapsing economy and society does not purturb them.

    (b) After a de-facto breach of EU treaties that a change of currency will undoubtedly be, reinforced by a possible negative response among the citizens of other EU nations after a default, Greece may be forced or seriously threatened to leave the EU, which the Greek elite (kleptocracy, political system, bankers) sees as an existential threat, for various reasons.

    On the other hand, nobody (you included) on the side of Greece staying the the EZ seems to have an answer to the dynamics of the monetary collapse in Greece, if it stays in the Euro.
    The math of compound interest are simple; with 70bn of bad loans, it will be impossible for Greek banks to reliquidate the economy (another 10-20bn will be needed just to keep them afloat). As more and more individuals and enterprises go into default against both banks and the state, they will effectively be disallowed from either doing business or working self-employed, while salaried labor becomes even scarcer, and foreclosure procedures freeze assets. GG debt will continue to accumulate, both interest and capital, while tax _payments_ will continue to decline (even with this latest governement plan of confiscating bank accounts). With this level of interest burden on the economy, there can be no gain in competitiveness against core EZ countries, whose interest costs are much lower (so long for “fair competition” in the EZ). So, lower utilization and lower competitiveness…

    Even if the EZ wanted to help Greece out of this hole (a very big “if”), there is no way to do it, according to bylaws, treaties, constitutions, etc. If you think that I am mistaken, that there is actually a way the EZ may revert the monetary system’s collapse in Greece, I am eager to hear it.

    But, until and unless I hear something, I can only see one rational answer:
    Greece must introduce a drachma and renominate all interest-bearing obligations under Greek law to it. As for GG defaulting on its debt de-facto, well, the GG will default anyway, at some point in the future… so what is the point about that?

    • I agree with your point that Yiannis is Yiannis is holding back. In regards to returning to the Drachma why re denominate and not outright default as it is inevitable anyhow ?

    • @buddhathegreek
      I was referring to (private) debts under Greek law: bank loans and deposits, taxes due, etc. Massive default on private debts, as is now happening, is a toxic poison for the economy (labor marker, asset prices, money market etc).

      Public debt is under English law. There cannot be unilateral renomination on it, thus, as you say, it will have to be an outright default. But having introduced a drachma, there is a reasonable proposal to be negotiated, to determine the size of the haircut: renomination of the debt.

  • A unilateral Greek exit would indeed be a catastrophe for Greece. A dissolution of the whole eurozone however wouldn’t. It would be very hard for Germany, Austria and some other countries for two or three years, leading to a deep recession. But as Prof. Jacques Sapir from France has outlined in his laudable study “les scenarii de dissolution de l’euro” http://fr.scribd.com/doc/160182345/Les-scenarii-de-dissolution-de-l-euro, the effects for the european south would be beneficial. These currencies would devalue, but they wouldn’t devalue as much against the dollar as they would against the new Deutsche Mark. Commodities however are paid in Dollar, not in Marks.

  • In Canada, we have the problem arising again of Quebec threatening to leave Canada. The premier of that province says she will use the dollar as currency and there will be no borders. I wonder: if Quebec uses the dollar will it be better off to separate? Wouldn’t the Bank of Canada have control of interest rates and money supply for Quebec and wouldn’t that be similar to the monetary union for individual countries in Europe? I live in the Atlantic region and we have to pass through Quebec to get to the rest of Canada so we will need a very, very long bridge to get there!

    • I have a friend living in Northern Italy who commutes regularly to S.E. France via Switzerland. He has no need of a bridge even though the two Euro-lands are separated by a Swiss Franc territory…

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