By Grant de Graf
This week, the ECB gave Greece an ultimatum. The country's parliament must approve tougher and more stringent austerity, if it wants further funding from the ECB. The instruction came at a time, when a series of violent riots in Athens served to reflect the sentiments of Greece's citizens, towards the existing austerity measures imposed by the government. Teargas and force were required by the military, to battle protesters.
Now the ECB is calling on Greece to impose further austerity, obviously a consequence of the Central Bank's view that the riots in Athens were little more than a local Sunday afternoon tea party.
Before Prime Minister George Papandreou stands before his bedfellows and pronounces, "Friends, leaders and countrymen, lend me your wallets," some consideration is necessary.
Austerity on its own, is not a solution. It hasn't worked in Europe and neither will it work in the U.K. Venture down the streets of London, and ask any baker, banker or candlestick-maker. "How's the Oxford scholar?" And they will tell you. "Unemployment has rocketed, spending is tight as a vice, and investment optimism is about as inspiring as the weather." In Europe that is what many call, an optimistic report.
True, Adam Smith did famously proclaim that when governments disinvest from the economy, market forces are permitted to respond and adjust to inefficiencies, so that equilibrium and full employment is achieved. But Joe the plumber is still chalking his snooker cue, waiting for the invisible hand to appear, laden with treasures from a sunken Spanish Galleon. "In your dreams, mate," a far away voice echoes.
No seriously, economist Adam Smith tested the dynamics of his rationale in a hypothetically free and efficient market scenario. However, as long as monetary policy combined with regulation is being dictated by a European Central Government, the Euro zone is anything but free. Even Smith would declare that all bets are off.
As I have oft pronounced, Europe's biggest challenge is the incongruent fashion in which monetary policy is dictated, independent to the application of fiscal policy. (See "Portugal Victim of EU Poison Pill Policy.") That dilemma is precisely what Europe and Greece are struggling with now. The inability of central bankers to implement fiscal policy at a central level (where monetary policy is enacted), especially when it runs contrary to local electoral sentiments. While Central Bankers party in debate over the unfolding Greek tragedy, politicians in Athens struggle with souvlaki, taramosalata and empty bottles of ouzo. Gone are the sounds from bouzoukis and belly dancers that pierced the Greek nights. All that remain are a few remnants of shattered crockery on the floor, a reminder of what it was like to be in Greece, when things were on a roll.
But Greece's biggest handicap, is its attachment to the Euro. Without the Drachma, there is no adjustment mechanism to which Adam Smith referred, a free rate of exchange instrument that could provide Greece with the ability to facilitate an economic recovery that would be export driven, due to competitive pricing. (See Paul Krugman's "The Road to Economic Crisis Is Paved With Euros")
In order to resolve the Greek crisis, some bold measures are necessary. They are actions that will test the courage of men and remain imprinted on the flag of every Greek citizen's heart.
Firstly, the Government needs to vote against austerity. Secondly, it needs to formalize an exit from the Euro currency and revert to the Drachma, to facilitate an economic climate that will expedite a recovery. Thirdly, it needs a moratorium with all its creditors, freezing capital and interest rate payments for at least 3 years. Fourthly, it needs to decrease taxes and draft a blueprint that will provide the market with strong incentives to facilitate job creation, unlike the United States stimulus initiative. It is a proposal that will be a strike against an economy in recession, a step towards a recovery that will lift a nation.
Should Greece take the unfortunate step of voting for austerity and accepting the ECB poison pill package, it will simply be the launch of a new marketing campaign, to sell the public tickets on the Titanic at discount prices, rather than a step that will provide the country with the means for economic recovery; regrettably so.