On countries without currencies
Jul. 8th, 2015 07:52 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksOr, 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.
Greek money
Date: 2015-07-08 09:17 am (UTC)Re: Greek money
Date: 2015-07-08 04:23 pm (UTC)On the "cash" side, just issuing new notes in new drachma form would not get rid of the euro as the de facto man-in-the-street currency. I suspect we would have a dual pricing system for years, with some imported goods only available in the "bullion" currency of the euro, while local produce would eventually trade in drachma. The degree would depend on how scarce the euro was as a printed note.
confused by ELA and economists commentary
Date: 2015-07-08 08:44 pm (UTC)Furthermore, Hellwig makes the claim that banks had a liquidity issue rather than a solvency issue (which I remember reading alot about on your old blog years back) as greek people were simply holding on to their Euros instead of putting them into bank deposits as apparently there is a law that could see euro-denominated bank deposits get converted to Drachma easily (I don't have a link to it).
Bundesbank chief Jens Weidmann trashed ECB's programme of emergency liquidity assistance a little over a week ago by saying it's a "problem" that banks, without access to markets, are using funds provided through ELA to fund a state which also has no access to markets.
Hellwig critized that notion, saying Weidmann implies that greek banks have no access to markets which Hellwig says they had no problem getting funding until end of 2014. Which again brings up the question of insolvency. If bank had been insolvent for many years, how did they get funding until end of 2014 (if that claim is correct). Was this basically investors thinking that greece would get bailed out eventually?
Hellwig continues saying greek banks did not use this year's ELA funds to fund the state but used it only to replenish cash that has been withdrawn. But didn't Greece not just auction off T-bills for 2bn which primarily was bought by said banks? Am pretty confused here.
Finally, Weidmann implies that it is against the european statutes if ELA funds are used to fund the state. Hellwig claims that the statutes don't say anything about how ELA funds are used.
Original text of Hellwig's commentary is here, but all in German
http://www.oekonomenstimme.org/artikel/2015/07/die-ezb-und-die-deutschen-in-der-griechenlandkrise/
Re: confused by ELA and economists commentary
Date: 2015-07-09 11:53 am (UTC)The FT refers to "dynamic balance sheet assumption", which is a flashy way of referring to monies that the Greek banks say is worth 'x' but which most accountants would say is worth the rather lower 'y'.
But let's take the Hellwig line. There seem to me to be two lines - both flawed.
1) The Greek banks maintain that the money that they are owed is worth significantly more than what prudent accounting says it is worth. Now, this is, admittedly, a judgement call. First you have to assess the chance that you will be paid what you are owed, and also you have to assess the value of the collateral posted in case the loan is not repaid. It is I think the second part where Hellwig and Sinn seem to part company. It would take me a day or so to go through the available figures (the Greek banks are also not overly transparent in some places, which makes judgment even harder) and that's not something I feel like doing without being paid so to do. But this is the basis of the disagreement.
2) Hellwig argues that, if people were willing to fund Greek banks, things must have been fine within the Greek banks. I see this as no argument at all. There are a number of reasons that funding could have continued even though the banks were insolvent. Kahneman's analysis on risk-taking covers this. "Throwing good money after bad" (see the Nigerian 419 scam as a great exploiter of this) and "emotional involvement" (an unwillingness to realize one's losses) would all explain continued faulty lending.
The interesting thing
Date: 2015-07-11 04:40 pm (UTC)But actually, the interesting thing to me is that the German banks have managed to escape scot-free from all this (more or less). Practically all of their exposure, and it was quite obvious that they were massively exposed as early as, say, 2008, has been transferred to the German tax payer. (Notional. Today's and tomorrow's.)
Why is this interesting? Because the German tax payer is still blaming the Greeks for being Greek. Not the German banks for being German banks.
Re: The interesting thing
Date: 2015-07-13 05:29 am (UTC)This is basically down to very different cultures. Germans can't stand people that appear (to them) to not do much at all.
no subject
Date: 2015-07-22 08:31 am (UTC)