Refocusing Greek Energies in the Context of a New Global Monetary Arrangement

As discussions continue on EU’s “rescuing” of Greece, one cannot help but carefully consider as to how events unfolded over the last few decades in Greece, Europe and internationally in such a way that the financial/economic integrity and existence of institutions and countries’ stability has been questioned. Greece is a “peculiar” case, with parallels in other Mediterranean countries, where the post World-War II development of financial and political institutions was contaminated by historical and institutional memories that delayed, and still plague, the adaptation of more efficient institutional mechanisms that would promote economic development and productive employment.

In this short essay I discuss Greece’s place in a world without a financial “anchor”. A global economic environment that proves impotent in the face of concentrated attacks on currencies, sovereign debt and governments’ ability to finance debt. The attacks are essentially a vote of no confidence in governments’ credibility when faced with mounting deficits and uncontrollable accumulations of debt.

Let me state from the outset that I do not believe that there is any “concentrated” conspiratorial effort to undermine the Euro, Greece, or undercut the Euro’s ability to serve as an international reserve currency and substitute to the U.S. dollar. Markets, a vast network of financial intermediaries across the globe, are attacking – for a profit – what they see as the incongruity of the Euro’s monetary experiment with the fundamental economic reality that you cannot have a reliable medium of exchange, i.e. money, without a consistent and balanced approach to fiscal policy. Greece is simply the weak link in a chain of EU member countries, where public finances are simply inconsistent with the ability of the Euro to maintain its value against other countries. You cannot be considered a reserve currency for too long when markets anticipate the need to print money out of thin air to finance obligations and, effectively, devalue the debt. This argument lends itself to the global implications of currency fluctuations.

The key is a global return to stable exchange rates premised not an artificial and indefensible parities dictated by governments – e.g. the experiments with managed exchanged rates in the 1980s – but on the implicit links between the major currencies and a basket of commodities where gold will have to play a primary role. This link, however, will not be similar to the watered-down versions of the Bretton Woods (1945 to 1971) or of the 1920s but to the more solidly market-driven 19th century system. While many will raise eyebrows to the hint of any link to the “barbarous relic” as Lord Keynes had called gold, a return to a system where there is immediate and swift punishment by the markets to any sustained deviations from prudent fiscal management is seen by many economists as the only way to promote stable growth without a hint of long-run inflation.

The experience of many periods during the 19th and early 20th centuries when economies grew steadily even with declining prices (remember there is good and bad deflation) compared to the currency volatility and failures experienced since the mid-1970s, confirms the view that a new international monetary re-alignment is needed.

The collapse of major financial institutions over the last three years and the explosion of debt is a symptom of the ability implicitly granted to states, post-Bretton Woods, to inflate their currencies. In addition, financial institutions were allowed to excessively leverage in the pursuit of higher returns on assets wrongly conceived as low-or-free of risk, with regulatory arbitrage embedded in the system – see Basel Accords – minimum reserve requirements, and the faulty intellectual premise that money can be created out of thin air, without any real savings and productive assets to back it. The U.S. has been fortunate that the dollar is the international reserve currency, with the ability to export its inflation and its debt, but even there the limits are fast being reached.

For Greece, however, fake statistics was the last resort in the effort to hide the crippling borrowing needed to finance on-going deficits. In the current context, we Greeks should view the crisis as a blessing in disguise. Greece needs to loudly proclaim and act on its promise to dramatically reduce expenditures that are simply inconsistent with the productive capacity of the private economy. Other major European economies are able to finance public spending as their private wealth generators are productive and strong enough, still, to support that spending. Even there, however, that ability is severely tested as the ratios of debt-to-GDP mount with adverse demographics looming large in the very near term.

As the Prime Minister of Greece mentioned, history is calling and the choices made will define the nation for decades to come. In a world of shrinking financial options, and as the international community is, in my estimation, fast heading towards some new global financial arrangement, the option for Greece is clear:

- intensify focus on allowing domestic private producers to enhance wealth and capital accumulation by reducing public borrowing that exhausts the ability of domestic banks to lend to businesses. Capital accumulation, genuine savings (not freshly printed money), and productive activities are the fundamentals of a prosperous nation. The ability to provide to the less fortunate is the outcome of prosperity and that ability is impaired when few are required to pay for the many, as sadly has happened in Greece over the last 40 years. (Unfortunately, a lot were fooled thinking that the subsidized pensions and borrowing was manna from haven, instead of expensive loans);
- ensure that tax evasion is aggressively pursued while at the same time providing tax reforms that will broaden the tax base, lower tax rates, and incrementally provide to taxpayers the rationale for abiding with the tax law;

While I am confident that the current government’s policy makers have a much clearer view of the needed reforms and the process of implementing those reforms without jeopardizing social coherence, it is imperative that no-one masks or evades the full disclosure to all Greeks of the impasse that has been reached and the need to return to the fundamentals of fiscal prudence and financial stability: stable currency, liberty of trade (domestic and international), reliable administration of justice, and taxation that does not excessively affect economic choices.