Greece joined late and never conformed to Germany’s idea of the Euro, but it nonetheless served a very valuable purpose, explains Spanish economist Enrique Viaña Remis, who anticipates Spexit will follow Grexit
Today, we talk insistently-indeed, all too insistently of Greece leaving the euro. The debate is raised in Manichean terms (at this time administrators of the revealed truth abound) to predict the worst. Or is that Greece is bad at paying their debts which, worse, are forever asking for money, or Germany is an evil power that has sucked the blood out of the Greeks and intends to continue doing so. If anyone believes any of these hoaxes, they are an idiot. Irredemiably so.
Certainly, Greece does not fit the euro that Germany wants. But this is not new: it already knew in January 2001, when Greece joined the eurozone. Explain this to the uninitiated is difficult, but perhaps it should summarize by saying that the euro is a laboratory experiment. Nothing similar had ever been done, and when it did occur it was following a theory developed by Canadian economist Robert Mundell in the sixties; thanks to his foresight he was rewarded with the Nobel Prize in Economics in 1999, the same year the euro began to circulate to other eleven countries, including Spain, two years ahead of Greece.
What Mundell came to say is that a common currency could circulate among several countries that had not waived their independence in other areas, if three conditions are met: 1) free factor mobility between countries in the common currency area; 2) perfect wages to productivity adjustment; 3) income transfers from countries doing better out of the currency, to those faring worst. Discarding 1) due to cultural and language barriers (and because at some point racism and xenophobia would arise) the architects of the euro were confident of 2) and 3).
But from the beginning everyone knew that the adjustment of wages to productivity would be more perfect in some countries than in others; and Greece’s paperwork suggested it would be the least perfect.
Greece – the Euro-laggard
So why he let Greece in? Why does nobody ask this question now? Because, note, it did not join the Single Currency with the other founding members, no. It arrived two years later because everyone already had doubts. But it entered nevertheless. And this happened because it suited everyone. It was the first to enter after the founding eleven. And this gave an immense marketing boost to the euro. Eastern countries began to join the European Union in 2004 and then began to seek entry into the euro, as: “If the Greeks can do it …”.
So it had a political purpose, but not only. Currently, there are 19 members of the euro zone, out of 28 EU member states. The weight of these 19 economies together has led to a significant premium for the euro vis-à-vis the convertible currencies in global financial markets over a considerable period of time. That represents profits in the tens of billions to those holding the euro, derived form the value of Euro deposits, a substantial improvement in the terms of trade for the eurozone and a substantial reduction in the rate of inflation, thereby improving export competitiveness.
All this was the result of a process in part facilitated by the ‘laggard’ Greece. But now do they mention this? The Greeks feel used and with reason. At the time they had to endure and continue to endure the accusation that “the Greeks fiddled their accounts.” It is the kind of stupid hypocrisy that never helps solve anything.
Mundell, who is alive and so you can ask him if I am right, added a third condition, in the absence of free factor mobility within the eurozone; it would require income transfers, i.e. free funds from the less efficient countries. Oh, I know this horrifies purists of market discipline. Why would Mundell include such a thing in his theory?
Greece’s Euro prize – debt
Because Mundell, unlike the purists, is smart. He foresaw that the benefits of the common currency would be distributed asymmetrically; and if this asymmetry could sneak by in good times, it would destroy the monetary union in times of crisis. It is not that income transfers are fair; but they are necessary for a currency area where, despite the fact that not all states had implemented adjustments in efficiency, it can nevertheless function with as an optimal currency area. And what we see is that there has been no transfer of income to Greece; absolutely none, even in the worst moments of the crisis.
Only debt, the servicing of which has demanded of the Greeks the rigor of Shyllock. At most, there was a capital transfer, reluctantly and in the form of debt restructuring, when it was clear that the Greeks could not pay it all back. But, of course, that neither resolved nor could solve the problem, as could easily have predicted under the theory. Now it has reached the point that the Greeks, still unable to pay their debts, face expulsion.
The problem is, by throwing Greece out of the euro zone we risk killing the goose that lays the golden egg. The advantages of the euro will decline further, as other countries almost as unsuitable as Greece exit. The demonstration effect will act in reverse. You will not be able mention Greece without holding it up as a bad example; in the future it will be said: “For this reason Greece was thrown out, so now there’s no reason not to oust Spain too”. And so it will end, in just the fashion that Murphy’s Law predicts.
* Economist, University of Castilla-La Mancha
Translation/edit by Revolting Europe