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Analysis
How Greece can maintain its pride

How Greece can maintain its pride

A way to avoid years of suffering

by Meghnad Desai

Fri 26 Jun 2015

Greece faces a difficult decision. Accept the creditors’ terms, feel guilty about past behaviour and suffer for 40 years while repaying the debt – or take the disrespectable option. Cut loose, renege on the debts and print a new currency. This would entail acute misery for about five to seven years. Like a woman in an unhappy and cruel marriage, Greece can quit and suffer in freedom or stay put and be respectable in misery.

Greece’s exit from the euro, when it comes, should be with pride. It should be on a note of regaining freedom and protecting the pensions of the most vulnerable. It is better to honour pension obligations owed to your citizens than to honour foreign creditors. But Prime Minister Alexis Tsipras must find a way to make the seven years’ misery palatable. He has to appeal to solidarity and national pride, and make smart policies to exploit the new-found freedom. There may be a chance to be counterintuitive and cut corporation tax to attract foreign investment. Greece could be like Ireland.

In the euro area, governments have no control over their macroeconomic policy. They cannot indulge in even temporary deficit spending without flouting the Stability and Growth Pact. Their currency’s exchange rate is fixed and interest rates are beyond their control. They cannot issue money, but must wait for banks to borrow from the European Central Bank to expand credit. It is the Gold Standard reinvented.

If Greece left, there would no doubt be costs including capital flight. But it would have some immediate relief. The first freedom would be budgetary respite as debt servicing would not have to be paid.

The second would be the liberty to print its own currency – perhaps the eurodrachma (or a Greek stamp on all available euro notes). To begin with, the eurodrachma would be at par with the euro. It could then float and depreciate. Greece would have inflation and this is one way in which the costs of all the pending structural changes would have to be paid. The government could promise inflation-indexing of pensions, but with a lag. This would be a hidden tax, softened for pensioners, while the rest of the population paid through inflation.

In extremis, if Greece wanted to retain residual respectability, it could promise to pay the debt back as and when GDP is 25% above its 2009 level. But I would advise against any more.

Depending on whether the Syriza party wants to be red or dead, it can reverse its stance on privatisation. It will have to find shrewd ways of raising cash against public assets even if it wants to stay sentimentally attached to public ownership.

It could, for example, lease Piraeus port to the Chinese for 99 years while retaining eventual ownership. Freedom comes from the recognition of necessity.

Prof. Lord (Meghnad) Desai is emeritus professor at the London School of Economics and Political Science and chairman of the OMFIF Advisory Board.

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