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2010-05-20

A policy response to the Greek dilemma

In addition to my earlier comments (see here), I have developed another idea - a policy response if you like, related to the Greek dilemma. I include it below. Though it is a bit long, but the easiest way is through a temporary emergency regime of tariff and export subsidies within the eurozone only, contained in the bracket. See the following:

The current Greek economic problems associated with its fiscal deficits and sovereign debts raise an important question: how can it get out of the economic problem without own currency but a member of euro zone?

A normal economy has its own currency and can devalue its currency to export its way out of domestic troubles assuming external world is healthy enough to absorb that, but Greek does not have that luxury.

What a devaluation of own currency does is to lower the price of its products relative to that of other countries’, so they are cheaper internationally and demand for them increases and its demand for products overseas falls. This adjustment to currency and the chain reactions ensuing increase domestic employment and GDP in own currency and the economy is boosted, without domestic deflation, wage cuts and etc.

Theoretically, the same effects can be achieved through wage cuts and price falls of domestic products. But wages cuts are much more painful and politically difficult to do. Employees don’t like them.

There is very little difference between own currency devaluation and uniform wage cuts including a fall in interest rates and company profits. The main difference lies in the perception.

Practically, uniform reduction in wages, interests and wages are not easy to realise, because company profits may not fall or fall less than wage cuts. Also assets prices are another difficult issue. So there are more redistribution issues when “deflation” is concerned.

So what is the best strategy for Greek, if it continues to remain in euro?

Maybe one way is to apply a special tax on everything with the aim to have a uniform deflation without the need to cut wages and etc. The tax revenue can be used to provide subsidies to exports to lower prices.

(Maybe the best way is to tax imports and subsidise exports to change the relative prices. In the current Greek case, those trade duties should only apply to its trade with euro members only. That is not generally in accordance with WTO rules probably, but that could be a way reflecting the unavoidable costs of a monetary union with independent fiscal responsibilities like the euro zone without incurring violation of WTO rules with other non-euro countries.)

However, whether the Greek public will accept it or not depends largely on government communication of the issues involved and its rationale.

A question is: how to treat assets? Maybe, a way is to just tax transactions/sales of assets, in the same way as taxing wages, interests and profits.

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