An open letter to the voters in Greece

Congratulations! Your votes in the general election last week have humiliated the two main parties which have dominated Greek politics over the last 30 years. Traditionally they have between them garnered 2/3 of your votes which has meant that one or other of them has always been in power. They have failed you miserably, by i) permitting many of your fellow citizens not to pay the taxes levied by government, ii) making up for it by creating swathes of public-sector jobs where everyone receives two extra months pay each year to compensate for the fact that they do have to pay taxes, iii) tolerating corruption across most parts of the economy, iv) persistently running large budget deficits and borrowing heavily from anyone who will lend to them, and v) fiddling the figures to hide this from you.

Pasok and New Democracy, the two parties which signed up to the bailout package with its attendant further austerity, between them only managed 1/3 of the vote this time round and so even together they do not have a majority in parliament, under the system which so favoured them. 2/3 of your votes went to small parties which said they would not accept more austerity. Sadly, I have to tell you that these other political parties are not explaining the reality to you either. In recent weeks opinion polls have shown that around 70% of you want an end to austerity and to remain as members of the Eurozone, and so this is what these parties have had as their campaign platforms. Clearly this would be a good outcome for you if it could be brought about, but unfortunately this is not an option that is available.

The harsh truth that no one seems to have told you yet is that you have to choose between further austerity whilst staying in the euro and coming out of the euro with only a bit more austerity. The euro is a club for economies which wish to organise themselves along German lines – it requires real control of public finances and does not tolerate desires for pay increases which have not been earned through productivity improvements. Your economy, whilst it has been straitjacketed within the euro, has become hopelessly uncompetitive. This now requires that you go through a devaluation process and your only choice is whether this devaluation is internal or external.

The internal devaluation process means that you can stay in the euro but that you regain competitiveness via cutting the costs in your economy. This means reducing both the quantity and price of labour and in quite significant terms, both in the public and private sectors. This is difficult and very painful and will take several years, but that is the price you will have to pay if you wish to remain as part of the euro. Latvia is a recent model of how this approach can work.

The external devaluation process means that you come out of the euro, and bring in a New Drachma as your currency, which is then allowed to float freely. Many economists estimate that it would immediately fall by about 50%, which would double the value of all your euro-denominated debts, so it would make sense to default on all such debts. You will become poorer but competitive overnight and you can start to rebuild your economy from a lower base –  you will still require a little austerity as even without paying interest on all its debt, your government is still running a deficit, and there will be no one prepared to lend to them, so some further cuts are required. In the first year or two there will also be very high inflation, which will reduce your real standard of living as the costs of imported goods soar. Iceland is a good recent example of this approach.

It appears that you will soon get another chance to vote – I hope that this is the clear choice presented to you by your politicians. The second option is I believe, by far the better of the two.

With best wishes,

Jeremy

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