October 2011        

Default, devalue, and defend

Mainstream political commentators and economists are all united in the expectation that a Greek default is nigh. Meanwhile the ubiquitous “Troika” of the European Union, European Central Bank and International Monetary Fund continue to squeeze blood from a stone, pursuing the equivalent of an economic holocaust on Greek society through employment and wage cuts, universal tax increases, and the hollowing out of social services.
     Curiously, while Greek “socialists” fiddle—not sure whether to submit to such pressures or to prepare conditions for default—mainstream talking heads expect, or hope for, an “orderly restructuring,” leaving the euro zone, and a return to the drachma. Analogies with the Argentine scenario of the last decade, when the state dropped the currency peg to the US dollar, are mooted as a possible pathway.
     An orderly restructuring or default is not possible, however. Argentina was an isolated case. “Contagion,” as it is dramatically called in the media, was not a runner: Argentina’s problems were country-specific and never threatened to topple Brazil or Chile, for example.
     If Greece defaults on its debt, shedding some of the burden of Troika-imposed austerity, the citizens of other debt-ridden states will rightly wonder why they remain chained. The suffering masses of Ireland, Portugal, Spain and Italy will demand to know why they should continue to be lumped with “convincing the bond markets.” Indeed it is precisely this that worries international investors.
     Bond yields will rise, making the financial situation in Spain and Italy, and pressures on “bail-out” funds, unbearable. Finance houses throughout Europe will collapse like flies if a Greek default is followed by others. The ECB would have to pursue quantitative easing to keep banks afloat. The only consequence of printing money in this situation would be a surge in inflation.
     Economic growth is already sluggish, so stagflation would probably rear its head. Decline in Europe would ripple across the Atlantic, affecting an already fragile American economy. A global depression, the “double-dip,” would become a reality.
     Greece is an important milestone, as in the near future it may offer some possible indicator of our future path. The Greeks may drop out of the euro and, in Keynesian fashion, devalue their currency. This would enable the Greek economy to restore, at least in the short run, “competitiveness” on the global market, selling their goods more cheaply. This is a strategy being advocated by some forces in Ireland.
     Debts would also have to be devalued to prevent widespread destitution. Greek industries that had borrowed in euros would face oblivion, as their income would be transformed into cheap drachmas.
     It is not inconceivable that a bank run would result. Certainly the classes of wealth and privilege, alongside sections of the middle class, would lead a run on the banks, seeking to withdraw their euros and transfer them abroad.
     A similar situation might arise in Ireland. To maintain the viability of the economy the Greeks would need to nationalise banks, guarantee deposits, and create capital controls.
     Default and devaluation, therefore, are unworkable without more robust actions to prevent the flight of capital. Capital controls, orchestrated through a state-controlled bank and state-directed investment strategy, would be required to grow the Greek economy. This latter issue of capital control needs urgent addressing in Ireland too.
     The strategy of “default and devalue” on its own is not enough and unlikely to be effective because of the flight of capital. Furthermore, its economic rationale—restoring competitiveness and essentially beggaring thy neighbour—is likely to produce copycats in the long run.
     A defensive response of national-democratic control of capital in the first instance of reacting to possible economic calamity must therefore form part of any progressive economic strategy.

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