A solution for Greece – and Wales?

Rhys David assesses the Greece deal, and ponders whether Wales can draw anything from it.

It is good that conifers grow so quickly in the damp climate of Finland, given whole forests must have been cut down over these last six months for newspaper reporters, columnists and leader-writers to opine on the Greek debt crisis. Now, we know, it is over or nearly over, on terms that with a little more give and take might have been reached many months ago at much less cost emotionally and financially to the Greek people. So much for all that’s been written about Grexit.

But is it over or will we be revisiting the Greek crisis again in a few months’ time when the impact of the new austerity measures the Greek people are going to have to endure begin to seem unbearable? Greece is a country where the political spectrum does not merely cover different ends of the centre ground as in Britain or Germany, for example, but embraces the extremes as well. Its post-war history includes strong support for Communist ideas and the growth in more recent years of a powerful right wing party.  Greece has also experienced several decades ago a coup by Greek colonels and a failed counter-coup, the end of military rule, the restoration of democracy and the overthrow of the monarchy. Pacific it has not been, and bitter enmities have lain not far below the surface, arising in part out of divisions dating back to German occupation in World War Two.

Comparisons with Wales obviously do not apply – and yet perhaps there are some parallels, economically if not politically. Both countries derive significant income from tourism and have regions where visitors are one of the main sources of income and employment. Both suffer from outward migration of some of their most talented people – to England in the case of Wales and to the wealthier parts of the European Union, including Britain, in the case of Greece. (Puzzlingly, quite a few of these Greek exiles in Britain seem to be university economists.) Neither has had great success in building manufactured product or service sector brands. Its main internationally recognised area of expertise is shipping, though the returns this provides to the Greek economy are less than they might be. Wales and Greece, in short, are – and there are exceptions, of course – low productivity, low income zones within wider currency unions, the Euro in Greece’s case, sterling for Wales, and both run substantial budget deficits.

There, this slightly tenuous comparison ends. Greece’s deficits, the failure to collect enough tax to cover spending on public services, such as health, education, pensions and social services, have had to be met by borrowings from its richer neighbours. (Or, as many would see it, are the result of irresponsible lending by its partners in the Eurozone.) For fear of moral hazard, that is that others would follow suit if it were relieved of its debts, it now has to mortgage itself for generations to come to repay what it owes to Germany, Benelux, France, and other wealthier countries.

Wales does not have a Central Bank and does not have to negotiate seriously with its partner nations in the UK for its funding. It does not even have a banking system of its own, the solvency of which politicians and the public need to worry about.  As part of a political as well as currency union its deficit  is met through transfers from the rest of the country, a position that, in fairness, many other parts of Britain also find themselves in as part of an economy where a disproportionate amount of national wealth and hence tax revenue is generated in London and the south-east.

Wales clearly has the best of all worlds from this system, though whether this induces complacency about our economic record and a sense that we do not need to worry about improving it is another matter. Greece clearly has the worst of all possible worlds. It cannot devalue to remain competitive and financial discipline is being administered by partner countries most of which are substantially wealthier. If the European Union were to fulfil its dream of ever closer political and economic union then a system of transfers from richer to poorer parts could be introduced, as between the individual states in the US or between the countries of the UK. Welfare payments, and Europe-wide personal, corporate and consumer taxes could be standardised across the Eurozone, and retirement ages synchronised. The Greeks would not have to worry too much about being competitive, assuming the Germans were willing – and this is a big if – were prepared to continue to pick up the bill. This is a long way off, however, and as it is the Greeks are being forced to try to achieve competitiveness while at the same time being driven to personal and corporate bankruptcy. And it is this paradox that ultimately suggests the latest solution may yet again be temporary, lasting perhaps no longer than the next repayment crisis or political backlash.

So how can the Greeks escape this dilemma? A return to the drachma is dreaded for the message it sends out and the uncertainty that would lie ahead but it is hard to see how ultimately it can be escaped. Perhaps the answer lies in what seems to be common practice in many neighbouring non-EU member states and in large parts of Latin America – a parallel currency. Travel to Egypt, Turkey and many other places, and the Euro, dollar (and to a lesser extent pound) are widely accepted (and usually regarded as of equivalent value to each other). Even if Greece left Euro temporarily or permanently Euros would still circulate freely as this is what tourists coming to a revived tourist economy would bring and spend on meals, transport, site visits, and gifts. (Accommodation and car hire are in most cases paid in hard currency – sterling or Euro – before arrival, and will mostly end up in the bank accounts of international travel agents, airlines, hotel groups and car hire companies based outside Greece.)

The new drachma could be used to pay local salaries and for domestic transactions – paying for food and other services – and would stay in Greece. In this it would resemble the local currencies that many municipalities, including Bristol and Brixton in the UK, have adopted to ensure money spent locally is recirculated in the same area, though with the crucial difference that local pounds in Britain are usually exchangeable at par with the pound sterling.  To trade internationally – in order to buy the goods and services required from outside the country the reserves of Euros that the country was able to build up from its tourist trade and from selling Greek products overseas would be used. The drachma would float against the Euro and other currencies, enabling Greece to regain competitiveness in its international trade activities. In order to be able to afford essential imports Greek businesses would need to improve their productivity so that the currency maintained an upward path in value. The high cost of purchasing overseas goods while the drachma traded at a low value to the Euro would encourage import substitution. A drachma economy would also enable Greece to win back tourists lost in recent years to other more competitive non-EU destinations such as Turkey.

A formal or informal dual currency system would perhaps allow Greece to take a break but not an irrevocable one from the Euro, with the option of re-joining once its economy, unencumbered with debt after the inevitable default that would follow an exit from the Euro, had recovered and become competitive. Indeed, a system of alternative domestic and international currencies running alongside each other could be a model for other weaker Eurozone states unable to match in the short or medium term the high standards demanded by the Germans, the Dutch, the Luxembourgers and the Finns.

As for Wales the idea is not totally irrelevant. A Cardiff, a Valleys, or a Gwynedd pound would in the same way encourage the recirculation locally of money spent locally.

Rhys David began his career as a journalist with the Western Mail in Cardiff before moving to the Financial Times where he spent 30 years as a specialist writer and later departmental editor. He now writes mainly on regional economic and Welsh issues. He studied at the University of Oxford and is an Honorary Fellow of the Institute of Welsh Affairs.

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