Wednesday 23 May 2012

Grexit made easy

According to Euronews, a "Grexit would be ugly and costly" because..."The return of the drachma – which would immediately be massively devalued against the euro – means Greeks would not be able to repay foreign loans."

1. Sure, it might be ugly and costly for Greek's creditors, but a politician's first duty ought to be to his or her own electorate, so here's what I would do if I were in charge: simply start collecting taxes and paying public sector salaries, pensions etc in a new currency, let's call it "Drachma" for sake of argument.

2. There is no need to officially leave the Euro-zone (subject to whatever niceties are buried in some treaty or other) and the rest of the Greek economy can continue to denominate transactions in € if it so wishes.

3. So instead of paying out €100 billion a year in pensions etc and collecting €90 billion in tax (running a €10 billion annual deficit), they just start paying out GRD 100 billion (pensions etc being converted 1 for 1) and demand GDR 100 billion in tax. Conceptually, this works best with Land Value Tax (or a Poll Tax) but it works with income tax or VAT as well.

4. There doesn't need to be any indicative exchange rate between GDR and the Euro. At present, VAT is €23 for every €123 of gross turnover, and this raises (say) €18 billion. So they need to collect nominal GDR 20 billion in VAT, so the rate is just set at GDR 26 per €123 gross turnover.

5. That would ignore the fact that spending by pensioners etc is 40% of GDP, to keep the arithmetic simple, sales made in GDR could be exempt from tax for the time being. So the rate then has to be bumped up to GDR 26 per €78 turnover (i.e. 60% of the original €123).

6. So there will be businesses who need GDR to pay their tax bills; and there will be pensioners who have GDR which they have to exchange for stuff. There's supply and demand on both sides, and things will soon settle down.

7. Before the Grexit, a shopkeeper with €123's worth of goods on the shelf had to keep back €23 of the sales proceeds to pay the VAT; he now knows that he has to try and get total sales proceeds in the ratio of €78 to GDR 26.

8. So €78 + GDR 26 is OK - this implies an exchange rate of GDR1 = €1.73. €117 + GDR 39 is also OK - this implies an exchange rate of GDR1 = €0.15. It's up to each shopkeeper to try and work out the optimal GDR prices, i.e. an item which currently costs €10 might be priced at GDR6 or it might be GDR60, I can't imagine it will take them more than a few days to work this out by trial and error.

9. Hey presto, deficit eliminated, Euro problems solved, revolution/military coup/civil war averted.

3 comments:

Anonymous said...

There's an online game in the form of a "country simulator" called eRepublik. It's rubbish. Some time ago the Goons tried to take over Greece, but before they succeeded the outgoing president managed to print a load of money, causing hyperinflation. The Goons then compounded the issue by trying to impose exchange rate controls instead of dealing with the problem head on. There's no real point to this story.

Graeme said...

"simply start collecting taxes and paying public sector salaries, pensions etc in a new currency, let's call it "Drachma" for sake of argument. "

a lot of heavy lifting is being done in that sentence.....;)

Bayard said...

"means Greeks would not be able to repay foreign loans."

and the Greeks will care about this how much?