Immediate Solution for the Greek Financial Crisis

The recent agreement to write off a substantial portion of Greek bonds only postpones but does not resolve the essential problem. The key to the Greek crisis lies in economy, not finance. Any financial solution that results in further contraction of the economy will only aggravate budget deficits and debt servicing problems. Economy can restore financial stability, not vice versa. The solution lies not in successive rounds of external funding at concessional interest rates, no matter how crucial that may be in the short term, but in unleashing the productive forces of the Greek economy which has contracted by more than 10% in the last two years, 15.5% in December 2011 compared to December 2010. The most essential requirement for a quick turnaround and a lasting solution is to drastically reduce the unemployment rate which has tripled since 2008 from 7.2% to 20.9%. Youth unemployment is nearing a totally untenable 50%.

The tremendously wasteful underutilization of precious human resources and productive capacity is Greece’s most serious problem and also its greatest opportunity. This is not merely a Greek crisis. What happens today in Greece has relevance to all of Europe as well as other mature economies. Money that energized economy for two centuries has reversed its role and is acting to strangle the economic vitality of prosperous, productive nations. The immediate need is to reverse the shrinking economy, release energy and revive economic dynamism. Addressing the swelling unemployment problem is a key.

Research by WAAS Fellows points to a strategy which could reverse the downward spiral in a short time, while avoiding ever increasing amounts of foreign assistance, national bankruptcy, or an increasingly likely withdrawal from the Eurozone. The debt problem is starving the Greek economy of essential liquidity needed to reverse the deflationary contraction. The capacity for a rapid and dramatic turnaround was demonstrated in the mid-1990s, when introduction of a freely-convertible parallel currency stopped hyperinflation and reversed economic decline in a matter of weeks, while safeguarding social welfare payments so essential for social stability.

The stimulative impact of a parallel currency has been documented around the world by thousands of experiments with complementary currencies, some operated by local governments such as the highly successful experiment in Wörgl, Austria, during the Great Depression and others implemented by non-governmental or commercial organizations. There are also countless instances in which communities and some local governments around the world have introduced complementary currencies to successfully spur the local economy. WAAS Fellow Bernard Lietaer has made an original contribution to theoretical understanding of the value of complementary currencies. In a report to the Club of Rome entitled Money and Sustainability: the Missing Link co-authored with Christian Arnsperger, Sally Goerner  and Stefan Brunnhuber to be released in May 2012, he attributes the recurring financial crises to the inherent lack of resilience in single currency regimes and advocates complementary currencies as an effective balancing mechanism.

The introduction of a dual currency regime – a fully convertible national currency (drachma) in parallel with the Euro – will stimulate domestic production, employment and demand, while simultaneously enhancing the government’s capacity to service its foreign Euro-denominated debt. Full convertibility of drachmas to euros at a floating exchange rate will ensure ready acceptance of the drachma domestically, while enabling Greece to remain in the Eurozone for all external transactions and improve the competitiveness of its exports, a critical requirement for a turnaround. Under present conditions of vastly underutilized capacity, the Greek Government could loan or spend drachmas to make idle national assets fully productive without generating inflation by restoring public services, stimulating public works, spurring entrepreneurship, implementing a jobs program to generate full employment, and investing in education and training to enhance human capital.

A growing Greek economy can support and service its debt obligations; a shrinking one can only become more dependent and insolvent. The dual currency will allow a natural and essential adjustment of prices between Greece and other countries of the Eurozone without compelling the government to undertake the politically disastrous task of cutting salaries or jobs. Raising domestic production will reduce social welfare expenses and increase government revenues. Drachma bonds can be issued to mop up domestic savings for productive purposes. Public investment will promote growth. A small differential tax on drachma-euro exchange and savings accounts can incentivize savings in local currency. A tax on speculative investments can redirect resources to the real economy. Acceptance of the drachma for some forms of services and taxes would ensure immediate demand for the new currency facilitating the transition. The Government might also combine a mixture of euro and drachma currencies in equal or unequal proportions in its welfare and salary payments, thereby immediately reducing its euro expenditures and eliminating its euro deficit. Most important of all, this strategy would shift initiative from the international community to the government and people of Greece and restore in a matter of days their lost sense of independence, which is so essential for responsible action and human development.

Greek thought still leads the world today. Here is a thought that can lead to action. Greece’s successful recovery can lead to European recovery and the world’s. Let Greek thought become a leader of action too.

Garry Jacobs & Ivo Šlaus