It's Time for the EU to Make an Example of Greece

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Includes: EUFN, FXE
by: David Goldman

The trouble with European debt negotiations is that they have not yet persuaded the citizens of highly indebted countries that they must consume less, work harder, retire later, and generally lead unhappier lives. That is what happens after years of living beyond one’s means. The Greeks in particular take the view that the Europeans need them (not to default) more than they need the Europeans, for their debt is so large that it would impair European banks were they to default.

Here’s a simple idea: Don’t allow them to default.

1) Kick them out of EMU and send them back to their miserable drachma, which would, of course, suffer an immediate devaluation of 50% or more. Announce that this is not a divorce but an annulment, given that the Greeks lied outrageously about the size of their economy in order to enter EMU, and never should have been there in the first place, and make clear that this only applies to the special case of Greece.

2) Allow European banks to continue to accrue interest on Greek government debt, through the following formula: the European Central Bank will issue scrip to the banks in the sum of unpaid coupon payments on sovereign debt, so that the bank creditors will own a sort of Payment-in-Kind (PIK) bond, an old junk bond device. Let the ratings agencies scream. The banks can show that the coupon payments on Greek sovereign debt have been paid by the ECB, in the form of additional claims on the Greek sovereign. In effect, the ECB would turn up at Greece’s door like the loanshark who says, “I bought your paper from the guys you owe, and now you owe me — and I want a piece of your business, or else.”

3) The European governments will then go to the Greeks to collect the debt. If the Greeks don’t want to sell their national patrimony, take legal action to seize Greek assets everywhere in Europe, starting with foreign-currency bank accounts, Greek ships in international ports, and so forth.

4) Demand that the Greek government seize the property of Greek citizens who have not paid taxes and auction it to foreigners. That would bring in plenty of foreign exchange. Sell the Parthenon, too. Sell it all. Of course, none of this actually will happen; pushed to the wall, the Greeks will find ways to find the money.

The result would be a temporary economic boycott of Greece in which the default consequences would be borne by the European governments rather than the banks, and the governments would use their collective power to squeeze payment out of Greece. The trouble is not that Greece lacks the assets to pay, but that the country consists of a collective tax dodge by all the owners of vacation properties. The average Greek owns several properties (due to immigration and a shrinking population) and lives by renting them to foreigners; rental is paid by agencies in London or Zurich into bank accounts in Liechtenstein. Greeks simply have no incentive to pay taxes and the Greek tax authorities have no capacity to collect them.

So many Greeks are in on the dodge that it is impossible to negotiate a solution by the normal means. By putting the default weapon out of Athens’ reach, and allowing the Greek economy to sink to its own level, a horrible example can be made of the recalcitrant Hellenes. Let the lights go out in Athens for a few days, and they will come to their senses. They will be poorer and their lives will be worse, but that is not the fault of their creditors.

Of course, the Europeans must then ring-fence the rest of its weaker members. But negotiations should go more smoothly once an example is made of Greece.