Rebuilding the Greek Economy

The Greek economy is in the doldrums. Barring an economic miracle, Greek taxpayers are looking forward to their next few generations being in economic bondage. The rumors of Grexit have been doing the rounds for quite some time. Other Euro states want to force Greece out of the Eurozone. However, contrary to popular belief, the laws of the Eurozone do not allow such an expulsion. The decision would have to be made by the Greek government itself and cannot be made by ECB, Troika or any other entity. What is happening right now is the postponement of the problem! The creditors and the Greek government are pretending that they are working towards a solution. In reality, wasting time is adding to the interest burden and severely hurting the Greek economy with every passing day.

It seems like the default is the only option for Greece. However, is default the end of the world for Greece. Or is there a silver lining to this very dark cloud? Greece could rebuild its economy from the ground up and they could do so fast if the followed economic fundamentals. After all, Germany has also been bankrupted twice in both world wars and has rebuilt its economy back again.

The Greek Default

Before Greece can rise to be an economic powerhouse, it would have to wither the storm. Contrary to popular belief, the Troika does not have Greek government by the neck.

The Greek government is revenue positive. This means that they have been making more in taxes than they spend on expenses. As a result, they can manage on their own in case the ECB debt funding is stopped in the future. This gives Greece some sort of spine to face the ECB and default on as much debt as possible. Attempting to pay back will be detrimental. Greece will have to curtail the freedom of its citizens for some time. Limited withdrawals of funds from the bank accounts will be allowed. This will help in building the much-needed capital for rebuilding the Greek economy.

The Post Default Budget

Greece will have to make some politically unpopular decisions if the economy has to strengthen. This means that Greece will have to implement pure austerity. This would further mean drastically cutting all non-essential government revenue. In many cases, the wages of government employees will have to be reduced by 50%. A base figure of 2000 Euros can be considered. Below this level, the pay cuts will be lower. If the salary is higher than 2000 Euros, then the pay cuts will be bigger. Since the size of the public sector in Greece is so large, any changes are going to save the government billions of dollars.

With no debt to service, these billions of dollars will be available to the Greek government to undertake infrastructure projects. These infrastructure projects will then bring down the cost of production and stimulate the Greek economy. All this can be done without raising a single penny in debt money! Raising debt money immediately after a default is an almost impossible scenario.

The Era of Parallel Currencies

Walking out of the Euro will not be so easy for Greece. A lot of their citizens would have their savings in Euros and businesses would need Euros to function properly. As such, elimination of the Euro would be disastrous. Instead, Greek government can allow parallel currencies to flourish. This is what the Swiss economy has already done. The payments due to government and for tax purposes must be made in the drachma. However, Euro can be accepted as legal tender as long as people are willing to hold it. The idea is to give time to people to convert their holdings into Greek drachma over an extended period of time. An attempt to force the people to exchange their currencies in a short span of time would be detrimental to the economy.

Adopt the Gold Standard

Very few people are likely to trust a government that has just declared bankruptcy. The Greek government would have to force people to accept the drachma. Alternatively, it could use the gold standard. The gold standard is the benchmark for money creation. It can lend credibility even to the worst currencies. The Greek drachma will be no exception. Citizens accepting the Greek drachma wouldn’t have to trust the Greek government. They could redeem their money into gold at any time. Since gold is accepted all over the world, no individual government would have the authority to manipulate its value.

Stabilize Banks

Like the Greek government, the Greek banks will also be facing a credibility crisis. This would mean the Greek banks are unlikely to find depositors if they follow fractional reserve banking system. Hence, Greece should create full equity banks which will lend 100% out of their reserves. People that invest money in such banks would know about the risks that they are undertaking.

To sum it up, Greece would have to face severe turbulence for the next couple of years. After that, it will be uphill, and over a period of time, they could build an economic powerhouse if they just stick to the fundamentals.

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