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On countries without currencies
Jul. 8th, 2015 07:52 amOr, Why Grexit is a misnomer, why it will end with a whiumper rather than a bang, and why Greece's international trade will probably still be denominated in euros by the end of 2015, no matter what happens this Sunday.
I have a lot of time for Poland's PM Donald Tusk; he has proved himself to be an efficient, albeit somewhat technocratic, Polish leader, and has brought a similar no-nonsense but low-profile approach to the EU presidency.
However, Tusk and other European leaders seem to be making a fundamental economic error when they talk about Greece "exiting the euro" if a deal is not reached by next Sunday.
Jean-Claude Juncker, president of the European Commission (the European bureaucracy requires lots of leaders) was somewhat blunter when he referred not just to the fact that a detailed plan was in place for Grexit, but that these plans included "humanitarian aid". It was, as it were, the first admission that the incompetence of political leaders could lead to a country in Europe suffering a humanitarian crisis because of economic incompetence on all sides.
But what puzzled me is that the politicians and the journalists have once again failed to read the history books. There will be no Grexit on Monday, whatever way things go. And the euro will not suddenly cease to be the currency of Greece. It is not up to the eurozone to say that Greece can no longer use the euro. Indeed, given the restrictions on individual central banks, any actual statement that Greece is no longer a part of the eurozone will have relatively little impact on day-to-day processes. The euro will still circulate. Goods will still be priced in euros. For international trade (which is going to be the real sticking point) export and import deals are still going to be signed in euros. The major impact of a so-called Grexit on Monday will mainly be the reaction of the markets and the manifestation of what we have known for more than two years – that the Greek banks are bust.
If Greece is "chucked out" of the euro, there's nothing to stop the Greek Central bank creating their own euros (on paper), although this will of course have the confusing effect of creating the Greek euro and the rest of Europe euro. I have discussed this matter before and I will not cover the same ground. It will be a mess, but it will not be the end of days. Indeed, Greece's membership of the euro will end with a whimper rather than a bang.
There is of course the minor matter of the €70bn owed to Germany alone – meaning that every German taxpayer is on the hook for about €2,000. A neat bit of sidestepping by the German banks there, since initially the Greek debt was theirs. But this is not a terminal debt. It is, so to speak, a whole new can that will be kicked down a whole new road.
No, the interesting thing in economic terms is at the micro level. At the moment Greece's economy is paralyzed. It is paralyzed because traders want to operate on a so-called "bullion" basis (where euros represent bullion) and there isn't enough bullion to go round for an economy to function. Since the velocity of bullion has probably slowed to virtually zero (if you get a euro in Greece you hang on to it for as long as possible) we are in a situation where for the economy to function you need to return to a credit economy, but no-one trusts anyone else to function on a credit basis.
How does one square this circle? What eventually happens is that the economy sputters into action by something (it could be stamps, it could be cigarettes) working as small change (but still with a euro as a measuring stick) and someone (it could be the Greek central bank, but it could equally be a respectable local merchant or landowner) doing the accounting. That accounting eventually sees the issue of IOUs, and those IOUs, if they are trusted, becoming de facto paper money. This emergence of paper money (frequently called fiat money, but this is a mistaken misinterpretation of the false dichotomy between paper money and, say, gold or silver – another article there one day) of its own accord has been recorded time and again in history. It follows the wish to anonymize transactions. Initially the debts of account, the IOUs, are transparent. You know who got what and who owes what. But once those IOUs start being passed around, transactions become anonymized and, indeed, the extent of economic activity becomes harder to measure.
So, from next Monday, we could see ourselves in the unique situation of a developed economy that has been paralyzed because of a lack of a fungible currency with any volatility (the euro has become a kind of ersatz gold) entering currency ground zero, because we are months away from an official new paper currency being printed and introduced officially. Economics abhors a vacuum almost as much as nature. Just because the current lack of cash has frozen the economy does not mean a continued lack of cash will mean a perpetually frozen economy. Cash will emerge to facilitate economic activity. It will emerge in different forms for different types of economic activity – perhaps stamps as ersatz euros, with accounting-based euro-denominated credit for internal transactions. For the few real euros still in play, they will be reserved for international transactions.
And, also, international players, facilitators, will also appear, because there will be a profit to be made here. That is why the euro itself will not vanish from the Greek economy, even if Greece has been kicked out of the euro. A facilitator will be starting with a clean slate. Unlike the ECB, he will not have the burden of the money already thrown at Greece.
And in a sense this is one of the keys and the basis of Tsipras's delusion. If Greece is "thrown out" of the euro, the biggest short-term headline impact will be that the ECB and the EFSB will have to write off what they are owed. It's Europe that is biting the bullet, not Greece.
I have a lot of time for Poland's PM Donald Tusk; he has proved himself to be an efficient, albeit somewhat technocratic, Polish leader, and has brought a similar no-nonsense but low-profile approach to the EU presidency.
However, Tusk and other European leaders seem to be making a fundamental economic error when they talk about Greece "exiting the euro" if a deal is not reached by next Sunday.
Jean-Claude Juncker, president of the European Commission (the European bureaucracy requires lots of leaders) was somewhat blunter when he referred not just to the fact that a detailed plan was in place for Grexit, but that these plans included "humanitarian aid". It was, as it were, the first admission that the incompetence of political leaders could lead to a country in Europe suffering a humanitarian crisis because of economic incompetence on all sides.
But what puzzled me is that the politicians and the journalists have once again failed to read the history books. There will be no Grexit on Monday, whatever way things go. And the euro will not suddenly cease to be the currency of Greece. It is not up to the eurozone to say that Greece can no longer use the euro. Indeed, given the restrictions on individual central banks, any actual statement that Greece is no longer a part of the eurozone will have relatively little impact on day-to-day processes. The euro will still circulate. Goods will still be priced in euros. For international trade (which is going to be the real sticking point) export and import deals are still going to be signed in euros. The major impact of a so-called Grexit on Monday will mainly be the reaction of the markets and the manifestation of what we have known for more than two years – that the Greek banks are bust.
If Greece is "chucked out" of the euro, there's nothing to stop the Greek Central bank creating their own euros (on paper), although this will of course have the confusing effect of creating the Greek euro and the rest of Europe euro. I have discussed this matter before and I will not cover the same ground. It will be a mess, but it will not be the end of days. Indeed, Greece's membership of the euro will end with a whimper rather than a bang.
There is of course the minor matter of the €70bn owed to Germany alone – meaning that every German taxpayer is on the hook for about €2,000. A neat bit of sidestepping by the German banks there, since initially the Greek debt was theirs. But this is not a terminal debt. It is, so to speak, a whole new can that will be kicked down a whole new road.
No, the interesting thing in economic terms is at the micro level. At the moment Greece's economy is paralyzed. It is paralyzed because traders want to operate on a so-called "bullion" basis (where euros represent bullion) and there isn't enough bullion to go round for an economy to function. Since the velocity of bullion has probably slowed to virtually zero (if you get a euro in Greece you hang on to it for as long as possible) we are in a situation where for the economy to function you need to return to a credit economy, but no-one trusts anyone else to function on a credit basis.
How does one square this circle? What eventually happens is that the economy sputters into action by something (it could be stamps, it could be cigarettes) working as small change (but still with a euro as a measuring stick) and someone (it could be the Greek central bank, but it could equally be a respectable local merchant or landowner) doing the accounting. That accounting eventually sees the issue of IOUs, and those IOUs, if they are trusted, becoming de facto paper money. This emergence of paper money (frequently called fiat money, but this is a mistaken misinterpretation of the false dichotomy between paper money and, say, gold or silver – another article there one day) of its own accord has been recorded time and again in history. It follows the wish to anonymize transactions. Initially the debts of account, the IOUs, are transparent. You know who got what and who owes what. But once those IOUs start being passed around, transactions become anonymized and, indeed, the extent of economic activity becomes harder to measure.
So, from next Monday, we could see ourselves in the unique situation of a developed economy that has been paralyzed because of a lack of a fungible currency with any volatility (the euro has become a kind of ersatz gold) entering currency ground zero, because we are months away from an official new paper currency being printed and introduced officially. Economics abhors a vacuum almost as much as nature. Just because the current lack of cash has frozen the economy does not mean a continued lack of cash will mean a perpetually frozen economy. Cash will emerge to facilitate economic activity. It will emerge in different forms for different types of economic activity – perhaps stamps as ersatz euros, with accounting-based euro-denominated credit for internal transactions. For the few real euros still in play, they will be reserved for international transactions.
And, also, international players, facilitators, will also appear, because there will be a profit to be made here. That is why the euro itself will not vanish from the Greek economy, even if Greece has been kicked out of the euro. A facilitator will be starting with a clean slate. Unlike the ECB, he will not have the burden of the money already thrown at Greece.
And in a sense this is one of the keys and the basis of Tsipras's delusion. If Greece is "thrown out" of the euro, the biggest short-term headline impact will be that the ECB and the EFSB will have to write off what they are owed. It's Europe that is biting the bullet, not Greece.
