Lessons from Greece
We in the Caribbean like to compare ourselves to other countries that are excelling in a particular area and emphasize that we are not too far off from them or that we are closing the gap in some way. Perhaps it is equally important to look at countries that we don’t want to be similar to, and to analyse what happened in that case so we can learn from their costly mistakes.
Let’s take a look at Greece’s debt woes.
There appears to be only three realistic options for Greece:
1. Debt cancellation (completely in the hands of Greece’s creditors – the IMF and European countries via their central banks)
2. Greek people vote to reject any further austerity which may trigger a Greek exit from the European Union (completely in the hands of the Greek people via a referendum this Sunday)
3. Greek people vote to accept further austerity in the referendum. A short term option is more austerity, but that will likely lead Greece to be in the same place within a year or two.
Summary of Greece this week:
· Greek banks will remain shut for six business days. Banks will open on Monday, July 6
(The Greek finance minister could decide to shorten or extend this closure)
. The Athens Stock Exchange did not open on today (Monday, June 29th)
(I expect it to remain closed for the remainder of this week)
· Capital control restrictions have been introduced at the recommendation of the Bank of Greece (the Greek central bank) whereby:
· Restrictions have been imposed on cash withdrawals. Greeks can all only withdraw Euros 60 (approximately US$67) daily from ATMs
· Web banking transactions will allow bills to be paid online
· Money cannot be moved out of the country
· Credit and bank cards issued outside of Greece can be used at ATMs with no restrictions
· The Greek Treasury is creating a Banking Transactions Approval Committee to examine requests for emergencies (such as importing medicines or sending remittances overseas) on a case-by-case basis.
Greece will default on repayment of loans from International Monetary Fund (IMF) due by June 30th, 2015 – barring some miraculous intervention.
“Here an elderly woman is photographed sobbing outside a branch of the National Bank of Greece after being told by a bank manager exactly what the capital controls mean — Greeks won’t be able to withdraw their pensions” :
Greek lessons to be learnt:
1. There will be winners and losers in a currency union
2. Trim and manage government spending early on
3. Central Bank policy (monetary policy) isn’t a solution to Government spending (fiscal policy) – details next week.
There will be winners and losers in a currency union
One of the unspoken truths about trade is that there will be winners and losers (for one country to be a net exporter another has to be a net importer). The Nobel Prize-winning economist Paul Krugman believes that “the current Euro structure, in which country governments control their own spending but borrow in a single currency, will never work over the long-term unless Europe’s richer states are willing to subsidize the poorer ones (the way richer US states subsidize poorer ones)”.”
If Mr. Krugman is correct then what are the implications for the Eastern Caribbean countries and their currency union and broadly what are the implications for the design and structure of CARICOM (given the aspirations of some to move toward a single currency).
“You can kill a man, but you can’t kill an idea” – Medgar Evers (Black civil rights activist)
I tend to disagree with this quote simply because, the way to kill an idea is to not share it. You can quote me on that. One of the ideas behind global trade is that everyone wins via comparative advantage. Conversely the idea being killed is that there are no losers in global trade.
Trim government spending early on
This is self-explanatory. However, in most democratic countries, political parties will not be elected if they campaign by stating that they want to reduce expenditure (lay off public workers) or raise taxes and ensure that they are collected (increase revenue). The majority of the citizens will not vote for any party stating these objectives. The easier path for politicians is to borrow money once they are in office and the repayment periods become due after they have left office. This has been the case in Greece and the case elsewhere. The voters are unlikely to change and hence the political parties have no choice if they are ever to be elected to office but to promise not to lay off civil servants and to promise not to raise taxes during general election campaigns. This is what happened in Greece.
How can Caribbean countries guard against the above? (use hashtag #caribguard with your answers on FaceBook and please remember to make the post public).
Central Bank Policy (monetary policy) isn’t a solution to Government spending (fiscal policy)
More on this next week.
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