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On the likely benefits from the Greek lesson

Published on May 30, 2012 by: in: Economy

The mass media, along with the political, social and economic authorities, flood us with comments on whether Greece leaves the Eurozone or not – and what costs Greece, the Eurozone and the world (including Poland) would have to bear. The markets suffer from consecutive tremors. A disaster is coming – they announce.

Meanwhile, it would be worth thinking what lesson Greeks and everyone else might learn from leaving the Eurozone and returning to some kind of new-drachma as well as from a possible declaration that Greece will not pay off its national debt. It is also worth drawing conclusions if such conduct is profitable for Greeks themselves.

picture: Aster-oid

First, let’s look at the return to the national currency. The result would be a very strong devaluation of drachma; decrease in its value by 50% or more in relation to euro and other currencies. Greece exports services (income from tourist industry, transport of goods by sea), but imports a considerable amount of industrial goods, apart from food. Due to a sharp increase in prices, the society’s purchasing power would fall by one fourth. (and without demonstrations, as it is impossible to demonstrate against exchange rate which is determined by market!).

But this is not all. No matter how large the part of the aid for Greece used to pay off debts is (partially cancelled anyway!), the rest of it, however, makes a contribution to the budget and is used to finance bureaucracy’s salaries, retirement pensions and public services. We need to remember that Greece has five times more clerks per million of inhabitants than, for example, Great Britain. When these aid “injections” end, either group lay-offs will take place or a great decrease in salaries (by one third? by half?). In any case, the purchasing power would decrease strongly also for this reason. Private economy (apart from tourism which will greatly benefit from devaluation) will develop more slowly, because the Greek banks’ credit potential will diminish dramatically .

A dramatic decrease of standards of living will first raise the level of anger, but later perhaps the level of the understanding of economic realities. An educational kick straight where “the back loses its noble name” may be of a stronger effect than flooding wheeler dealers with aid money and at the same time scolding – which is not too convincing – that if Greeks do not behave, a part of this aid will be withdrawn. As those wheeler dealers, who are still scheming, hope that others will finance them in their own interest, because the costs of the exclusion of Greece would be high also for those who help.

Other countries might be inflicted by the costs, but it is not necessary to herald hundreds of billions of losses. What is more important, if we count losses caused by Greece’s definitive exit from Eurozone, we must also consider current and future costs of subsequent tremors of the markets and their influence on the bank system. As well as the costs of slower economic growth when investments increase slowly, or don’t increase at all as a result of a long-lasting high level of uncertainty.

The Greek lesson will also cause other educational benefits. Firstly, it will be a warning for amateurs of “travelling without a ticket” who would like to choose the Greek way. Secondly, it will teach amateurs of tampering with institutions that it is necessary to predict behaviours previously disregarded thinking that “things will work out”. A club which is difficult to join, the rules of which are disrespected by the members, and from which it is impossible to sign off, had to get into trouble sooner or later. Lesson, though costly, could have great educational values…

Tłumaczenie: Monika Mokrosz

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About Jan Winiecki

Economist, professor of Aalborg University and European University Viadrina in Frankfurt, co-founder and president of the foundation of Adam Smith Center, former member of the EBRD board, co-founder and former president of the Polish Economic Society, laureate of Kisiel Prize.

Fredrich Naumann Foundation For The Freedom
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