What should be done about Greece – and what is likely to happen

10 July 2015

By Richard A. Werner

Will Greece default or exit from the euro, or both? First, I will describe the best course of action, then what I think will happen. The two are not the same: In Europe, policy actions have diverged from the optimal course of action for most of the last two decades.

Consider first the 1990s. Like many economists, at the time I pointed out that the plans by the eurocrats to introduce a single currency were thoroughly misguided: monetary policy is the most powerful policy arm, and there is no reason why any government should amputate it. As I argued then, historically the German D-Mark had been strengthening since its introduction in 1948 against the currencies of its neighbours, and this reflected – and compensated for – increased German competitiveness. Their weakening currencies allowed German trade partners to keep their export industries in business and their workers employed. By introducing a single currency, future revaluations of the German currency were disallowed. This amounted to a de facto future devaluation of German purchasing power, revaluation of the currencies of the other European countries, and hence would render non-German economies less and less able to compete against German exports over time.

To economists – even of the mainstream ilk – it was clear what would have to follow: Unable to depreciate their currencies, countries such as Spain, Italy, let alone Greece would need to conduct what is euphemistically called an ‚internal devaluation‘, i.e. wages would have to fall significantly and domestic purchasing power would have to be reduced. Countries refusing to implement such austerity policies or trying to circumvent them would face ballooning trade deficits with Germany and the need for ever greater borrowing from the German central bank (via what came to be known as TARGET2). Their debt would swell, until reaching an unsustainably high level, and then something drastic would have to happen – default, exit from the single currency, or both. It was an almost unique instance where most economists – famous for disagreeing – agreed.

When visiting Europe at the time (I was based in Tokyo in the 1990s), and meeting my peers, the chief economists at other banks, I would of course discuss what in my view was the highly worrying prospect of these plans to abolish the D-Mark. I was astonished by their reaction. About half of them insisted that those plans were so lunatic that, of course, they would not be implemented. This was a bad call, since the commitment to the single currency had been enshrined in the Maastricht Treaty in 1993 and the eurocrats were implementing a pre-ordained implementation plan resulting, by the end of the 1990s, in fixed exchange rates, and by 2001 a single currency. I had had the opportunity to hear Mr Alexandre Lamfallusy, the leading technocrat tasked with the introduction of the single currency, speak in Tokyo around 1996. He presented his road map. The astonishing aspect was the level of detail. He told us, years in advance, in which European cities the chiefs of central banks and the finance ministers would meet and what they would decide; when and where their deputies would meet and what they would decide; and where and when the heads of government would meet, and what they would decide: month after month of detailed scheduled meetings, with a complete script of pre-ordained outcomes, named after the cities in which the meetings were to take place. His confident presentation made it clear that he expected this script to be followed to the letter. I saw no reason to doubt his words. (Needless to mention, this is what happened).

The other half of the chief economists, like me, recognised that a single currency would be introduced, no matter how nonsensical the economics, since it was a political project. (The economics being bad, the politics was even worse: the end of democracy in Europe). They agreed with me that it was going to be a disaster. I asked the chief economist of what was then the fourth largest German bank: „If you think so, why don’t you speak up about this? You are forecasting gloom and doom, but I don’t see any reports by you or your bank about it.“ His answer was shocking: He said that there had been clear instructions from the boards of all the large German banks to their staff that no report on the abolition of the D-Mark and the introduction of a European single currency that was in any way negative was allowed to be published. The economists in the private sector had been muzzled by their bosses. The same I heard from journalists. So the German media only quoted the rigged reports from the banking economists.

As I warned in my 2003 book Princes of the Yen, in the event the European Central Bank was to exacerbate matters greatly by creating massive credit bubbles, banking crises and recessions in its first decade of operation. The ECB then ensured a prolonged crisis by not ending these banking busts, such as in Ireland, quickly and without costs to the tax payer (as central banks are uniquely able to do). Instead, the ECB forced governments to incur massive national debts to rescue their now defunct banking systems. This way, Ireland moved from fiscal poster boy to virtual default, needing an IMF ‚rescue‘.

And this, coupled with excessive consumption and spending during the boom years, is how Greece got into its current predicament.

So it is high time to recognise that the introduction of the euro was a mistake. It is time to cut our losses, instead of throwing good money after bad. Eurozone countries should therefore now show solidarity with Greece and all exit the eurozone together. This can be done by simply reversing the procedures of introducing the euro.

By abandoning the euro, each country would regain control over monetary policy and could thus solve their own particular predicament. Some, such as Greece, may default, but its central bank could limit the damage by purchasing the dud bonds from banks at face value and keeping them on its balance sheet without marking to market (central banks have this option, as the Fed showed again in October 2008). Banks would then have stronger balance sheets than ever, they could create credit again, and in exchange for this costless bailout central banks could insist that bank credit – which creates new money – is only allowed for transactions that contribute to GDP in a sustainable way. Growth without crises and large-scale unemployment could then be arranged.

As to the question of what will actually happen with Greece, we can be short: President Obama called Angela Merkel a fortnight ago and apparently told her that it was ‚critical‘ to keep Greece in the euro. Legally, Germany is not a sovereign state; in practice, it is beholden to the US. It is thus likely that a deal will be made, as the US project of ‚ever closer union‘, the transfer of all powers and sovereignty to an unelected Brussels elite reporting to Washington, must continue, no matter the costs for the European peoples.

Professor Richard Werner is Chair in International Banking at the University of Southampton, Director of its Centre for Banking, Finance and Sustainable Development, and Chairman of Local First Community Interest Company.

You can follow Professor Werner on Twitter @professorwerner.

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24 Kommentare

  1. Pedro · Juli 12, 2015

    If my country leaves the euro ( I live in Portugal ) , government will start printing money and I will loose my savings. That will be cathastrofic for me. I am almost 60 and I have savings in Euros. What should I do ? This is a simple question. Thank you in advance for your answer.

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    • Selva · Juli 17, 2015

      Buy pounds…

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    • thomas · Juli 19, 2015

      10% gold, 30% highly collectible art /real estate, 30% USD, rest in local cash for ooportunities.

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    • Christian Livingstone · Juli 19, 2015

      Obviously, Pedro, convert your fiat currency in the Euro to physical precious metal, strictly in your possession somewhere. Banks and State organizations are a shakedown and a scam. Why does anyone really trust them with anything?

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  2. tasos · Juli 12, 2015

    ALL THESE ABSOLUTELY RIGHT AND LOGICAL MEASURES WOULD BE TAKEN IF THE CENTRAL BANKS WERE NOT THE MASTERMINDS OF ALL THIS TURMOIL, JUST TO CREATE THIS DISASTER FROM WHICH NO EUROPEAN COUNTRU WILL BE SPARED.

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  3. Stuart Davies · Juli 12, 2015

    That is an extraordinary bit of information there, Mr Werner. Particularly, the revelation about the detailed plans for future meetings with preordained outcomes, years in advance. Your revelations of the orders from above at the big banks to keep it under wraps is very interesting also. The fact that the present situation was so widely forseen, and that it has all been scripted in minute detail years in advance is no surprise to me – the astonishing thing is that we now are allowed to see this sort of smoking gun evidence. I don’t suppose that this information will ever be permitted to make any splash in the corporate media, however, since the media has long been infiltrated, subverted, and simply OWNED by the same transnational banking interests that have taken over our governments.

    I have been contending for the past several years that the major events in the world economy that we have seen over recent decades has been the result of methodical, long range and highly detailed planning on the part of the transnational banking cartel that has consolidated its strangle hold on western governments. We can see this in everything from the Financial Services Agreement slipped in under the auspices of the World Trade Organization’s General Agreement on Trade in Services (GATS), which dovetailed with the repeal of the Glass – Steagall act and the Commodities Futures Modernization act to create the necessary conditions for what was obviously a closely coodinated and highly detailed plan to create a global financial crisis. http://www.gregpalast.com/larry-summers-and-the-secret-end-game-memo/

    Why would the bakster cartel wish to do such a thing? How could it be of benefit to them? This is actually fairly obvious if we simply look at some of the other components of their grand plan that have been revealed to us recently in the leaked provisions of the TPP, the TTIP, and the TiSA „free trade“ treaties they are preparing to shove down our throats. What do they want? They clearly want to impose „austerity“ on the entire world. They want to privatize all government assets and essential services, schools, prisons, water systems, police, fire protection, EVERYTHING. They are no longer satisfied with waging economic war on the third world, they are now bent upon stripping the wealth from the middle classes of every single nation within the scope of their nearly global reach, and reducing the population to abject poverty and desperation.

    Greece will be just the first in line for this treatment in the EU, but it is clear that they do not intend to spare the people of any nation. Their program has been being methodically implemented for the past few decades around the globe, and is about to undergo a radical acceleration.

    I think you make a very common misreading of the underlying global power structure in your last paragraph. In spite of the all pervasive „perception management“ smokescreen that seems to fool most of the world, there is a truly massive body of evidence which I believe makes it quite obvious that every political leader in the western world – including the president of the United States – is a leashed vassal of a transnational corporate banking cartel which has explitily repudiated allegiance to any nation. I assure you, Obama is not calling the shots, neither in Washington nor in Germany. The United States is not a soveriegn state any more than Germany is, a fact which will become evident to all in the aftermath of the (unconstitutional) passage of the TPP, the TTIP, and the TiSA treaties.

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  4. 53north · Juli 12, 2015

    Sounds like a ‚Swizz-ticker’…

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  5. 53north · Juli 12, 2015

    Sounds like a ‚Swizz-ticker‘..

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  6. petkov · Juli 12, 2015

    Bunch of BS and wishfull thinking. These countirews are slaves and slaves dont have independent action. Therefore nothing will be done. Keep on fantasizing

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  7. hpaijmans · Juli 14, 2015

    It would have been more convincing if Herr Professor had pointed out why Europe has to fail where the USA succeeded. Perhaps because he is trained in the english tradition, where all attempts to unify Europe are looked at with fear and loathing?

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  18. Christian Livingstone · Juli 19, 2015

    Obviously, Pedro, convert your fiat currency in the Euro to physical precious metal, strictly in your possession somewhere. Banks and State organizations are shakedown and a scam. Why does anyone really trust them with anything?

    Peace be with you all,
    C. Livingstone

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  19. gregorybateson · August 10, 2015

    Hat dies auf gregorybateson rebloggt und kommentierte:
    He told us, years in advance, in which European cities the chiefs of central banks and the finance ministers would meet and what they would decide; when and where their deputies would meet and what they would decide; and where and when the heads of government would meet, and what they would decide: month after month of detailed scheduled meetings, with a complete script of pre-ordained outcomes, named after the cities in which the meetings were to take place. His confident presentation made it clear that he expected this script to be followed to the letter. I saw no reason to doubt his words. (Needless to mention, this is what happened).

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  20. S.A. Asselbergs · September 3, 2015

    I take this very very serious. This passage „a complete script of pre-ordained outcomes“ is a mindwarp. It has a lot of implications. I am really concerned about our democracy.

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