14th February 2012
There are at least a half-dozen items that Greece must accept. The items on the list include proof of €325m in cuts, clarification on how Greece intends to reduce labour costs 15%, and reassurance that all Greek leaders will back the deal.
But Mindful Money asks, will this work?
As austerity bites deeper, few believe the overall crisis will be solved soon, and some are more sceptical. The proposed austerity measures won't happen, believes Mindful Money's economist blogger Shaun Richards – and will only deepen Greece's economic depression. He proposes a strategy of devaluation and planned default.
Shaun says on his blog: "Last year the Greek economy shrank by around 5% and this year looks like being the same or worse. So we see a country that is getting weaker and weaker in economic terms and in my view it is better that she acts now before the current policy structure makes her weaker still."
What should be proposed?
Although the immediate threat of Greece defaulting on its debt looks to have been averted, it still faces years of economic struggle.
Greece should act now – but with a different strategy, argues Shaun Richards, which he outlines here. The Greek government should declare that in future its currency would be the New Drachma – that this will be legal tender going forwards rather instead of the euro.
Support is growing within the country for a return to the drachma and some European leaders have said the euro could survive a Greek exit, says the BBC.
What would happen if Greece were to get a new currency?
The eurozone crisis is not just about political deals or high finance, but also about confidence in the cash in people's pockets. Given the euro was meant to symbolise a more united and stable continent for every eurozone citizen – this could be severely dented with a new currency.
When it comes to money, to the cash in people's pockets and bank accounts, then psychology lurks, and panic is possible. How would Greek citizens react to the prospect of their euro cash being overprinted into rapidly devaluing new drachmas? There is also the threat of devaluation, and the impact of this, as explained here by Shaun Richards – but it is part of the solution.
This blog provoked many responses – what do you think?
Chrisszbond1 says: "…Should Greece return to the previous currency and declare bankruptcy, the new currency would suffer a higher inflation than you predict.
"By renouncing European help, they would most likely stick to their previous governmental overspending and would be inclined to print currency to remedy that. Sound fiscal policy is not what Greeks are known for. So I disagree with your hopeful scenario, that leaving the Euro will be better than accepting German and French help."
Alinewton 2 adds: "Surely the end result of such a move would be an immediate flight of hot money out of Portugal, Spain & Italy with disastrous consequences right across the Eurozone? Although not likely to happen, the tidiest solution would be for Germany and the other rock solid economies to leave first, thereby slamming the door before the carpetbaggers can get out of the starting blocks."
KnaveOfHerts 2 comments: "If a country cannot balance its books, it makes no difference what currency you adopt, you still cannot balance your books. You can print your own money, as several do, but each time you do, you deflate your own economy, and pretend that you have balanced your books. You could also try to match your public expenditure to the net receipts to public purse. This was/isn't the case in Greece as it is, to a greater or lesser extent, elsewhere."
What about a planned default?
German Finance Minister Wolfgang Schaeuble said Europe is better prepared for a Greek default than two years ago, reports Bloomberg.
However, Nointerest 2 comments on Shaun's blog proposal: "My biggest concern is that the Greek administration just does not have the skills and competences to manage the sort of "planned default" you describe…In short, whilst there is demonstrably no capability to see through the required changes (tax evasion, opening closed occupations, etc) there is even less likelihood of successfully executing a Plan B."
Rods 1 comments: "I think it is inevitable that Greece will have to default (or worse) as I can't see the austerity measures working, so the Government will still be running a deficit, until the bailout money runs out. My guess is that will be at the end of the year when they hit trouble (money withheld, due to lack of progress etc) when the German elections are safely out of the way."
What do you think Plan B should be?
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