US Dollar Proposal for Greece

Georgios Gialtouridis

On Dec. 7, 2010, in a joint press conference at the Maximos Mansion in Athens, Greece with former Prime Minister George Papandreou staring silently, former IMF chief Dominique Strauss-Kahn in authoritarian style offered the following advice to the Greek people: “So don’t fight against the doctor. Sometimes the doctor gives you medicine you don’t like; but even if you don’t like the medicine, the doctor is there to try to help you.” Strauss-Kahn was referring to the reforms being introduced in Greece in order to bring the economy back on “the good track,” as he claimed.

The ‘medicine’ is the brutal pulverization of Greece’s economic landscape where in the name of productivity and competitiveness a relentless series of fiscal austerity measures is being forced upon the Greek people. Through a combination of deep cuts in salaries and retirement benefits, longer workweeks and increased retirement ages an attempt is being made to ‘depreciate’ productivity costs so that Greece may become more competitive. This tactic is known as internal depreciation. To help ease the pain, a controlled default and credit event utilizing PSI (Private Sector Involvement) was carried out and now there’s talk of yet another credit event targeting OSI (Official Sector Involvement).

Two years, one IMF chief and three Greek Prime Ministers later, the Greek economy having been subjected to fiscal atrophy now resembles, in Strauss-Kahn’s terms, a malnourished patient in the intensive care unit on respiratory support, intravenous therapy and feeding tubes with German and other European politicians portraying family members standing over the unfortunate soul determined to pull the plug.

On November 1, 2011 I had proposed to the United States Federal Reserve a plan for Greece to exit the Eurozone and adopt the US Dollar as its de facto currency for a five-year transition period before the country officially returns to the drachma as a way out of this economic depression.

In case of a Grexit, such a move is not only fiscally and economically feasible but it is also necessary in order to prevent financial chaos and possible civil unrest within Greece. As a member state’s exit from the currency union is not addressed in either the Maastricht or the Lisbon treaties, a disorderly default by Greece followed by the country’s abrupt exit from the Eurozone and immediate return to the drachma will most certainly create issues in the country’s financial sector not seen since WWII. As per various analyses, the immediate depreciation of the drachma would exceed 50 per cent followed by additional corrections. Speculators, hedge funds and credit rating agencies will prevent Greece from accessing the capital markets using its own currency as the country will be forced to meet any short- and/or long-term borrowing needs by tapping hard currency at unfavorable interest rates. For years the sellers of private property in Greece will demand that purchases be made in euros, dollars, pounds sterling, etc. due to the drachma’s depreciation. As such sales will include significant hard currency cash payments ‘on the side’ or ‘under the table’ it will add to the country’s already out-of-control and untaxed underground economy. For a while Greece’s financial sector will go back to the 40’s and 50’s as such will be the effects of a disorderly Grexit.

A Grexit is also detrimental to the welfare of the Eurozone. Many analysts agree that in case a member state exits the currency union the Eurozone will collapse like a house of cards. No member state would exit the currency union under normal circumstances. Only under excruciating conditions would an exit be even considered as speculation of contagion will act as a catalyst to the turmoil.

Structured on the Maastricht and Lisbon treaties, an attempt was made to create a currency union by violating the fundamental principles of fiscal integration. There is no political union or fiscal union in place. Missing these foundations which are necessary for any successful monetary integration, countries with trade surpluses and robust industrial output were joined in a currency union with consumer economies lagging in industrial prowess relying heavily on tourism and public expenditures.

An attempt at economic synergy is now being made by having Greece increase its competitiveness within the Eurozone by slashing wages to levels seen only in some former Soviet-bloc economies and most third-world countries. This is an ill-fated attempt to mold the Greek economy according to Germany’s specifications through wage cuts, extended workweeks and increased retirement ages. A Eurozone is taking shape where the North will solidify its dominant capital-intensive industrial base but in order for this synergy to be effective and successfully compete with the emerging BRICs the labor-intensive South must align with labor market conditions.

Τhe dynamics of this internal depreciation are trapping Greece in a vicious economic cycle with spiraling unemployment. There is also collateral damage in the form of migration of the local element seeking safer and greener pastures in the diaspora. Most of these Greeks who are able to migrate are young and educated and whose participation is critical for Greece’s economic recovery. Hopes for such a recovery are now pushed further into the distance as this ‘brain drain’ helps prolong the vicious cycle which is eclipsing the economic landscape. Not only are most of these young inhabitants displaced forever from their roots but they are now being replaced by an uncontrolled influx of impoverished illegal immigrants, most of whom are confined to the untaxed underground economy while benefiting from the taxpayer-funded welfare programs thus further burdening the state.

The next few months are crucial for Greece’s future as a developed economy. The Oct. 18-19 EU Summit will decide whether Greece’s financial sector gets the liquidity boost it needs to survive. Whether or not Greece meets the conditions set in the upcoming quarterly review, there is no more room for any additional cuts. As nationwide unemployment approaches 25 percent, the well has run dry. In addition, any privatizations under current market conditions will liquidate prime assets at fire-sale prices. The latest planned austerity package of 11,5 billion euros is not possible unless Greece gives away the family silver. Also, as per Article 28 par. 2 of Greece’s Constitution, 180 votes are needed to pass such measures. The current government coalition holds only 179 seats.

A second Greek debt restructuring is being discussed with the Official Sector being set as the primary target. This drastic haircut on the external debt held by the Official Sector, i.e., ECB, IMF and EU must be executed. This will follow the 70 percent haircut on Greece’s internal debt when March’s debt restructuring was implemented on the Private Sector and excluded the ECB-held Greek bonds previously bought in the secondary market. This debt restructuring strategy should be the last step before Greece exits the Eurozone. Without major foreign investments on the horizon to spur growth any time extension on the austerity program targets, which is also under discussion, will prove counterproductive as the government will simply be sweeping the issue under the rug and prolong the vicious cycle.

On Sept. 12, Germany’s Federal Constitutional Court is expected to rule on the legality of the European Stability Mechanism (ESM), the planned successor to the Eurozone’s current emergency lender, the European Financial Stability Facility (EFSF). The ECB plans to use the ESM as a liquidity mechanism, or in other words, as a permanent bailout fund. The German court’s decision will most probably include demands for certain amendments to be put in place in order for Germany’s President to sign the ESM Treaty, a measure which will most certainly tailor the ESM to Germany’s specifications.

Incidentally, less than a week ahead of the Sept. 12 court ruling the ECB has announced a plan to make unlimited purchases of government bonds in the secondary market as needs arise, without any impact on the Eurozone money supply. ECB President Mario Draghi claimed that such measures will provide “a fully effective backstop” against market volatility. This plan echoes my proposal in May 2010 for Greece to enter the secondary market at the time and purchase Greek debt in order to control bond prices and yields.

Γιατί δεν αγοράζουμε το χρέος μας;

This ECB program called “Outright Monetary Transactions” will target government bonds of remaining maturities between one and three years from countries which sign-up to the ESM for aid, provided that a country meets the conditions it agrees to when it signs up for the aid. This tug-o-war with hints of nationalistic fervor between the ECB’s Mario Draghi and Germany’s Bundesbank which opposes such bond purchases will become more tense over time as the two sides will not be able to reach common ground, proving once again that fiscal integration has unlimited obstacles.

German economist Hans-Werner Sinn has appeared in the aforementioned court proceedings and made his case doubting the ESM’s legality. In his reply to my US Dollar proposal, the outspoken critic of Eurozone bailouts wrote: By contrast, if Greece stays in (the Eurozone) and depreciates in real terms by cutting its wages and prices, its firms will largely go bankrupt, as their bank debt will remain while their asset values will decline. Moreover, the unions will be all in the street. To carry out the necessary real depreciation in the Eurozone is simply impossible. We calculate that Greek’s [sic] prices have to come down by 44% to be in par with Turkey. This is twice the real depreciation of Germany from 1929 to 1933. You know what happened. Greece would be driven to the brink of a civil war, at best.

If Dr. Sinn’s projections are correct, the impact of the current economic policies in the troika’s relentless attempts to make Greece more competitive will most certainly polarize Greek society.

In November’s proposal I detailed some of the benefits to Greece in case of a Grexit and adoption of the US Dollar for a five-year transition period before the country officially returns to the drachma. Using the Dollar Liquidity Swap Lines in coordination with the United States Federal Reserve, Greece’s economy will immediately obtain the liquidity and confidence necessary to entice growth. Agreements on trade and tourism along with exclusivity on military contracts will enhance the two countries’ strategic alliance. But the main concern I have encountered regarding my proposal is: How does it benefit the United States?

A disorderly default by Greece followed by the country’s abrupt exit from the Eurozone and immediate return to the drachma will most definitely create shockwaves across the Atlantic. Preventive measures such as the US Dollar proposal will contain the damage while the US Dollar will enhance its position as the world’s safe haven currency.

At the end of 2011 the share of US dollar-denominated assets in global foreign exchange reserves remained almost stable at 62.1%, down from 62.2% at end-2010 (at constant end-2011 exchange rates). The euro’s share in global foreign exchange reserves decreased slightly to stand at 25.0% at the end of 2011 when adjusted for exchange rate effects (down from 25.4% at end-2010, at constant end-2011 exchange rates).

With the prospects of additional Quantitative Easing (QE III) having been discussed at the recent economic conference in Jackson Hole, Wyoming, the Federal Reserve needs the US Dollar to maintain its position in global foreign exchange reserves in order to help neutralize inflationary pressures. The US Dollar also needs to hold this position as the world’s leading currency for reasons of global financial stability. The US Dollar proposal for Greece will reinforce the confidence placed on the American currency.

There is also the geopolitical perspective. The United Nations Convention on the Law of the Sea gives Greece the opportunity to exploit its offshore natural resources as much-needed revenues from the sales of its mineral wealth can help offset the country’s debt burden. The hydrocarbon exploration within Greece’s Exclusive Economic Zone can be used as a platform to boost Greece’s strategic alliance with the United States by licensing offshore exploration blocks to US interests which will in turn solidify the United States’ footing in the turbulent region in order to protect those interests. At a time when major infrastructure projects are being planned in the eastern Mediterranean region and the Caucasus in order to meet the world’s growing energy needs Greece has the opportunity to define its Exclusive Economic Zone and join Cyprus, Israel and the United States in a mutually beneficial long-term energy alliance and at the same time silence any hostile neighbors.

After two and a half years under continued tutelage from the IMF, the ECB and the EC there is no end in sight as the Greeks’ hopes and dreams disappear, all for the sake of a flawed fiscal integration vision. Greece now has the opportunity to unbind itself from the seemingly endless constraints and sacrifices planned not for Greece’s own salvation but for the Eurozone’s itself.

Georgios Gialtouridis
Dover, MA