Tuesday, 28 July 2015

Varoufakis has another questionable idea.

I dealt with one of Varoufakis’s debatable ideas here. He has had another: set out in this Financial Times article. The idea is as follows.

Greece has suffered from inadequate aggregate demand. Demand could be increased if what might be called “self extinguishing” pairs of debts could be extinguished more quickly. The example he gives is as follows.

“Suppose, for example, Company A is owed €1m by the state and owes €30,000 to an employee plus another €500,000 to Company B, which provided it with goods and services. The employee and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. In this case the proposed system would allow for the immediate cancellation of at least €210,000 in arrears. Suddenly, an economy like Greece’s would acquire important degrees of freedom within the existing European Monetary Union.”

That would certainly ameliorate what Varoufakis refers to as “the chronic liquidity shortage of a financially stressed public sector and its impact on the long-suffering private sector.”  In short, it would lead to increased aggregate demand.

Problem is that any extra demand in Greece sucks in too many imports, which results in Greece being further in debt. Ergo an increase in demand just isn't acceptable till internal devaluation has put right the balance of payments or “external deficit” problem.

Of course there’s alternative to internal devaluation and the austerity needed to bring it about, and that’s Grexit combined with normal or regular devaluation.


  1. IF Greece had it's own currency, of course devaluation would be automatic. Currency devaluation is a very efficient way of taxing one region and giving a subsidized bonus to all external economies (both at the same time).

    Because Greece has a common currency, the internal devaluation is much more difficult. This difficulty is compounded by the statistical fact that about 50% of the Greek GDP is the result of Greek government spending.


    It is hard for me to see that the Greek government provides any products that might be sold externally to improve the balance of payments.

    So where does Greek internal devaluation begin? What should the Greek government do?

    First to mind is that the Greek government should reduce ALL employee salaries, which must include all retired payments. Of course this is political dynamite. This action should be accompanied by a reduction of taxes on the private sector and by measures designed to encourage investment in productivity and exports enhancement. (I do not know how this could be done politically.)

    An alternative might be to have a dual currency system. The Greek government could make the above cuts and private sector enhancements. In parallel, the Greek government could issue part payment (to make up for the euro reductions) in a new Greek script.

    This new script would have a very uncertain value. It has the potential to become the new national currency or to become worthless. What value would it have to the Greek government as a tax receipt? I would say none because the Greek government can easier print script than collect taxes. On the other hand, the private sector would find it valuable if it replaced euros in payment of taxes to the Greek government.

    It might be possible for the private sector to pay MORE taxes if the majority of the tax payment was made in new Greek script.

    I will stop this comment here. The Greek situation is much better prevented than solved. The situation is far from solution at this time.

    1. “First to mind is that the Greek government should reduce ALL employee salaries..” They HAVE reduced the salary of some of those paid by government haven’t they? I’m not sure which though.

      For a country attempting internal devaluation, that salary reduction is helpful: under normal devaluation, the same sort of thing happens. That is living standards drop because imports become more expensive.

      Re “reduction in taxes on the private sector” with a view to encouraging investment, I suspect much of any such increased income would be spent on Mercedes cars etc, which would not be helpful.

      Re a 2nd currency, script in particular, many people have been advocating that for some time, me included. Peru and some other coutries use two currencies, and that seems to work. In Peru, it’s the US dollar and their local currency. The Greek equivalent would be Grexit combined with Greeks continuing to use Euros for many of their transactions: the EU and EZ can’t actually stop Greeks using the Euro.


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