x Abu Dhabi, UAEFriday 21 July 2017

Painful solution is better than none in Greece

Rather than a resort to anarchist, socialist and communist name calling, Greece's leaders need to lead it back to straight-up capitalism.

The word "economics" can be boiled down to its root in Greek: oikos and nomos, meaning household in the former, and rule, law or guiding principle in the latter. This is perhaps fitting, since the laws of economics now are rearranging households across Greece.

Over the past year, we have witnessed an indelicate dance as economics influenced politics, which in turn determined economic outcomes. Now, we are at the cusp of fresh elections in Greece, after last week's stillborn exercise. And in reaction, debates swirl over whether the country either should be ejected or choose self-exile from the euro. These aren't just academic questions that echo along the bread lines newly formed in Athens. Yet the existence of these public kitchens may well signpost a way out - if a new government can muster up some levelheadedness.

But first, the nagging question of euro versus drachma. The recent history of monetary policy is littered with crises. In many such cases, questions arose whether currency pegs should be reconsidered or if countries should give up their own central banks and adopt the dollar, euro, yuan and so on. But in each case the answer has been to stay the course. However punishing a currency crisis, it is far harder to rewrite monetary policy from its most basic point, the money unit.

To be sure, it isn't impossible to engineer a reversion to the drachma - it would need to be accompanied by capital controls, a ban on the trading of the new currency except for narrow exceptions and so on - but it would also mean cutting Greece off from the larger pool of liquidity in loans the country eventually will need again. For this reason alone Greeks will want to be wary of hastiness. And about that bank lending, Greek financial institutions have in the past borrowed abroad to lend domestically to Mr and Mrs Aristoteles for the family Audi. Here, those outside the peninsula also will want to be cautious. After all, the last thing foreign lenders will want to hear is, "Can I pay you in drachmas?" This could turn into a refrain sung in Spanish, Portuguese and Gaelic.

The problem with Greece is it hasn't had any good growth in too long. While the GDP's size and per capita wealth have until recently been sufficiently admirable, a look at the current account and balance of trade tells another story. Borrowing fuelled consumption as Greeks imported more than they sent overseas from their labours. They "bought" growth, rather than creating value.

True, a return to the drachma would allow Athens to calibrate monetary policy in favour of competitiveness. Yet, the soup kitchens show another way out. High unemployment depresses the price of labour through the law of supply and demand: a domestic devaluation that lowers costs to the economy. Whatever government the Greeks manage to get in the next month needs to see this as a virtue, an increase in competitiveness it can supplement by making it easier for business to use Greek labour. Rather than a resort to anarchist, socialist and communist name calling, Greece's leaders need to lead it back to straight-up capitalism.