The Third Way after NO Vote: How Greece Can End Austerity and Stay in the Eurozone

Opinion by Susan Bellan

Even with the no vote winning by a landslide in Greece’s referendum, Greeks are still being offered two unpalatable choices. Option One is to stay in the EEC and accept austerity. Option Two is to leave the EEC and return to the drachma. Each of these options will result in a further giant shrinkage of the GDP, massive unemployment and hundreds of thousands or perhaps millions more normally self-sufficient Greeks falling into poverty and destitution. No wonder people had difficulty choosing the “ least worst “ alternative.
There is a third way out of this disaster, which will lead towards job creation, prosperity and some debt repayment. The Greek government can create a Local Currency (LC) which is backed by the Euro and use this to pay 50% of its expenditures. The first stage would be a public education campaign to explain how LC works and build support amongst civil servants, pensioners, business and the general public. Most importantly, the government will guarantee that it will accept LC as legal tender for the payment of all taxes, services, products and fees it provides. Next it will explain that Greeks will be able to purchase LC bonds with a 3 to 5% better interest rate than nationally available Euro bonds. It will also announce the creation of a new and exciting Lottery Bond program, where seven year bond buyers can win prizes paid out in LC, with frequent small payouts and infrequent large payouts in the millions of LC.
The next stage will be getting ready for implementation. All cash registers and debit/credit card processing machines in businesses and ATM’s at banks will need to be re-programmed to accept LC debit cards. This sort of change is not unusual and is standard procedure when VAT rates are changed and new types of credit cards are introduced into the system. Greek banks will set up the infrastructure for LC accounts for all businesses and individuals, similar to what they do when they offer people accounts in other currencies like the US dollar. The initial LC programming is also very doable and involves new algorithm and computer codes being devised, costing in the order of $20 million dollars, which is a very small one time cost in relation to the Greek government’s annual budget of approximately 43 billion Euros and the Greece’s GDP of 250 billion Euros.
Once the public education campaign has been completed and the infrastructure is in place, each month the Greek government will start paying all of its expenses in 50 % Euro/50 % LC payments. As its annual budget is approximately 43 billion, this means that 21.5 billion will be spent in Euros and the remaining 21.5 billion Euros will be deposited in Greece’s central bank to back the LC’s. Depending on the exchange rate, it will have a larger budget than previously, of which part of the increase can be used as stimulus in LC’s and part for debt repayment in Euros. If one LC = .8 Euros, the budget will now be 21.5 Euros + (21.5 X 1.25 =26.875 LC’s) = 48.375 of purchasing power, providing an additional 5.375 billion, which could be used as 2.5 billion for Euor debt repayment and 2.875 for LC stimulus. If one LC = .6 Euros, the government could spend 21.5 Euros + (21.5X 1.33 =28.6) = 50.1, giving it a surplus of 7.1 billion which could be used as 3 billion for Euro debt repayment and 4.1 billion for LC stimulus. Funds raised through the seven year LC bonds could also be used to fund long term public infrastructure, social housing, environmental protection, energy conservation and alternative energy production projects.
Those receiving LC payments will be much better off under this system as compared to Options One or Two. For example, a Greek Civil servant who has a good chance of being laid off under austerity or exit, will if they earned, say 20,000 Euros annually, still get 20,000 — 10,000 Euros and 10,000 LC’s. If he spends all his funds in Greece, he will still have 20,000 of purchasing power and not experience any loss. If he decides to move to France which is highly unlikely and converts all his LC’s into Euros, he will experience a minor loss of purchasing power. If one LC = .8 Euro, his 10,000 LC’s will be worth 8,000 Euros, so he will have the equivalent of 18,000 of purchasing power rather than 20,000 but will have kept his job which is dicey under Austerity and his savings will still have considerable value which is unlikely under Exit. If one LC = .6 Euro, he will have 16,000 of purchasing power. Conversely if he decides that he does not need Euros at all, he will actually make money, as if he had received a raise. By converting his 10,000 Euros into LC’s, he will get 12,500 if one LC = .8 Euros and have 22,250 purchasing power or 23,330 if one LC = .6 Euros.
There are various precedents for doing this. In 1815, the Isle of Guernsey created a Guernsey currency in response to the British government’s appropriating about a third of the island government’s revenue to pay for it share of Napoleonic War debt, leaving it without enough funds to pay for its staff and basic repairs to Guernsey infrastructure such as its port and dikes. When the government said that it would accept Guernsey currency for all tax payments, all merchants agreed to accept the currency at par and it has operated beside the British pound for over 200 years. In Cuba, the country has had a dual currency system, whereby government employees, social transfers and government expenses were paid in the local currency. This 100% government local currency system saved the country from total collapse but created understandable resentment between those with access to tourist dollars who earned considerably more and those earning non-convertible local currency.
The Third Way with its 50/50 repayments would ensure that civil servants who collectively receive (12 billion of the Greek government’s budget), those receiving social transfers (24 billion) and the rest (7 billion) would be in the same place if they themselves spend their funds on a 50/50 basis. They would lose far less than under Austerity or Exit and could increase their purchasing power through converting their Euros into LC’s. Experience with local currencies in other places has shown that businesses and professionals who receive LC’s will re-spend them as much as possible rather than converting back to the national currency, since they might as well spend at par rather than taking an unnecessary exchange loss. The reality is also that LC will be a small fraction of the entire 250 billion Greek economy and there will be little or no inflation since LC’s can only be brought into being through conversion from Euros.
LC, being a virtual currency rather than a cash currency, could only be used with debit cards. This means that all LC transfers could be tracked, making tax avoidance much more difficult. Government revenue from tax collection from individuals, professionals and businesses would therefore increase greatly, making it unnecessary to increase the VAT to punitive levels. High VAT’s drive business underground and are a regressive and unfair tax which disproportionately tax the middle class and the poor, who spend most of their income on local goods and services.
It is time to “ think different”, to quote Apple founder, Steve Jobs. Public finance needs to be innovative, rather than just assuming that it can operate with the same tired and ineffective assumptions and processes, which no longer work and are making ordinary people much worse off when there is no need for it. Every other field is accepting innovation and changing the way they do things, resulting in advances in medicine, communication, education and transportation. Why not public finance as well ? The Euro was introduced to promote trade within Europe and increase prosperity, which it did very effectively until 2008. The European dream to create peace, prosperity and stability is still worth preserving, but needs some adjustments to provide more flexibility for its diverse membership with many different cultures and economic situations. The Euro’s founders never intended that its use deprive sovereign governments within the EEC of the ability to deal with massive unemployment or to invest in or maintain basic infrastructure and services. The Euro was meant to make life better for ordinary Europeans, not to cause them to lose jobs and savings, to fall into poverty and destitution and for European youth to become a lost generation.
Adopting the Third Way will bring confidence back to Greece, get people working again and prevent otherwise solvent businesses from going bankrupt due to economic chaos. By pioneering a new way of doing things, Greece will lead the way and show other EEC members facing similar difficulties that they can still stay in the EEC but have the tools to run their countries according to their individual social, economic and cultural circumstances and look after their people’s needs very well.
*Susan Bellan is an economist, businesswoman and mediator. In the 1990’s, as Chair of the Banking Issues Committee for the Canadian Organization of Small Business, she advised the Canadian government on banking and led a campaign to make Canadian banks act more responsibly in their communities. She is a co-founder and former president of Toronto Dollar Community Currency.

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