Who is Blinking First: Greece or the EU?

February 12th, 2015
in Op Ed

Written by

Yanis Varoufakis, Greece’s new Finance Minister, is all over the news lately for standing up to the European Troika – the ECB, IMF and European Commission (EC) (In my opinion, Germany should be included in this as a stand-alone opposition entity too).

Follow up:

But, while the new Greek Administration seeks to reduce the debt burden, the ECB is calling what is so far their unspecified bluff, by refusing to process Greek bonds.

A Wall Street Journal article summarizes the situation thusly:

“Even with an extension of the current program, there will be challenging months ahead. But without such an extension the situation would become very tough,” one EU official said.

Another EU official confirmed that there was little willingness among eurozone governments and the ECB to allow Greece to issue more short-term debt, so-called Treasury bills, to plug funding holes in the coming days. An informal request to increase treasury-bill issuance to €25 billion from €15 billion currently—made by Mr. Varoufakis at meetings in Brussels earlier this week—is a no-go for Greece’s creditors…

Europe’s reluctance to let Athens borrow more short-term debt raises questions on how the government will meet debt repayments in coming months. In March and June, Greece has to pay almost €4 billion to the International Monetary Fund and smaller creditors. Bigger issues await in July and August, when some €7 billion in bonds held by the ECB mature.

But Greece’s financial situation could become dicey even before then. If the current bailout program expires as scheduled on Feb. 28, Greek banks won’t be able to get liquidity from the ECB anymore, due to the country’s bad credit rating. After that, they could still get funding from the Greek central bank, through so-called Emergency Liquidity Assistance or ELA, but this is also subject to ECB approval.

One of the EU officials said that ELA could continue “for some time,” without giving further details. The ECB has in the past threatened to cut off ELA funding to banks in Ireland and Cyprus to force national governments to agree on a new bailout program with the eurozone.

Germany, meanwhile, the biggest holder of Greek debt, is saying “Nein” to any thought of writing off the debts, and Varoufakis is back-pedaling perhaps by saying there is no question that Greece will pay its debts and will stay in the EU. The fact is, though, that without a new loan by the end of February, Greece will default, so there is indeed, very much a question of whether it will repay its debts.

What are the alternatives?

A possibility came out when I co-interviewed Varoufakis, along with New York Henry George School President Andrew Mazzone, in the fall of 2013. During that interview, I was able to ask him specifically about the monopoly on money creation, something Henry George was against as well. Here is the link to that, as well as to his nuanced response, after agreeing with me.

Would an approach that includes direct issuance of money (drachmas) by Greece in place or in addition to, Euros, better serve Greece and the EU at this precarious tipping point? I hope the world will find out. It will have to be soon if it is to be at all. The alternatives are default, a write-down, or dropping out of the EU, which Syriza and Varoufakis have rejected so far.

Minute 6:20 Scott: This is why I advocate along with Henry George and other monetary reformers that we break up the monopoly of money creation itself and that that way the politicians are not going to be bribed by money because they have their own supply, because it seems that politicians are very cheap in the world of finance that these bankers operate (in) to buy off for congress and it is a modest investment from their point of view and that they'll continue to do it and there's no reason not to as Andy says.  Why wouldn't they?  But the only way to break that ....I believe... is to break the monopoly on money as well as the monopoly on land and the land in the expansive sense as meaning all resources.  So if we don't take this monopoly power away from the financiers in around two years then what hope is there for the actual productive class to have any sort of parity in the society?

Yanis: Spot on.  I agree I agree entirely but there's one danger in this narrative, not that I disagree with you, but we have to be very careful how we hone it because today that is as we all know... there is a tea party/libertarian argument against the monopoly of money, against the Federal Reserve, against fiat currencies and in favor of a Hegelian dialectic blueprint for privatizing money and effectively allowing private banks to issue their own currencies.

Now this libertarian pipedream, which of course is never going to come to fruition, is a political bulwark against the agenda that you just outlined so we must be very clear about this.  It is not the problem ... that we have state fiat money.  The problem is that we have ...a Federal Reserve System in the United States, European Central Bank in Europe, which is in the pockets of the private financiers.

And the task is not to undo the state's control of money.  The point is to strengthen it but to make the state operate...utilize its control of money on behalf of manufacturers, on behalf of creative people, on behalf of all those whose lives are wrecked as we speak by the rent-seeking behavior of the financiers that control through the revolving door strategy the regulators.
Minute 9:00

It’s clear Varoufakis agrees with the majority of economists in that economic demand must be increased. His Syriza party promotes stimulus as well. The problem is, as monetary reformer and reporter Bill Still points out, is that Greece has no Monetary Sovereignty. The only way they can regain it, without dropping out of the EU altogether, as Still advises, is for Greece to produce money (drachmas) on its own. I tweeted this question to Varoufakis here but received no reply:

@yanisvaroufakis Time for sovereign debt-free money as we discussed on Youtube interview http://bit.ly/18GKf9M @6:20 & U agreed?

Further attempts to get Varoufakis' comments on this article were similarly not successful. Understandably, the new Finance Minister is in very high demand these days, but it would be interesting to hear his current views on Land Value Taxation* and Sovereign Money.

Sovereign Money must be introduced in Greece and it must be allowed to devalue. Contrary to popular belief, Greece is neither a basket case or welfare state, and is in fact, growing slightly, 1.9%, albeit from a very depressed state with a “nearly 30 percent (loss of) GDP in a little over half a decade; on the current course, it would take, by latest estimates, two generations for the country to get back above water,” say Mark Blyth and Cornel Ban in a recent Foreign Affairs article. As many authors have noted including Varoufakis, these are Great Depression levels.

reece Exports

Mineral fuels make up 37 of Greek exports and would presumably be more attractive if their currency was devalued. Other exports would become correspondingly more attractive too, offering job opportunities to replace some of the small business jobs that have gone under during the implosion.

When I discussed these possibilities with the lead interviewer from 2013, Andy Mazzone, he suggested an economic plan, which I had consulted with him upon previously and agree with:

The Mazzone/Baker Plan:

  1. Issue drachmas for local consumption and spending. The amount should be enough to meet the 30% Output Gap, but not enough to cause too much inflation; the problem now, of course, is rampant deflation caused by too little money in circulation.
  2. Agree to pay off the debt over 100 years, 1/100th per year. In reality, this will be the basis for negotiation, but it is a concrete one, something that has not been offered so far.
  3. Use the devalued currency to encourage cheap tourism to Greece and exports. Tourism growth estimates vary considerably but 16.7% is a good mid-range calculation in 2014, and tourism remains Greece’s main economic engine, supporting 53 job categories.
  4. Tax the large landowners with a Land Value Tax.* It turns out that the Greek Orthodox Church is the country’s second largest land owner, after the government, but actually, this is imprecise, because in Greece, the church is part of the government, and its priests also collect a salary form government and the church owns stock in publicly traded companies like the Bank of Greece.

Says a recent article in the Telegraph:

One group to join the protests in Athens against austerity measures is Make the Church Pay. Its members are fed-up with the inadequacy of the church administration to support their country in its hour of need. A similar Facebook group – Tax the Church – has 100,000 supporters.

"They simply don't pay. They are so rich, and yet their contribution is minimal," says Theodora, one of the protesters.

The scale of the Greek Orthodox Church's assets shed light on this resentment. The exact value of the Church of Greece, including land, property, artifacts, commercial revenue and shares in government companies, is unknown but experts estimate the 500-plus monasteries, 7,945 parishes, 130,000 hectares of land and 1.5pc stake in the Bank of Greece is worth €7bn to €15bn.

But in the same article, Varoufakis complains it is too difficult to disentangle what the Church owns vs. government holdings. Yet, this ought to be done, and even under the most generous church and state separation scenario it seems like there are holdings to be taxed more, held by the church.

Perhaps a deal could be struck with the Greek Orthodox Church that they could keep their tax exemption if they would agree to offer a Local Exchange Transaction System (LETS) currency based on their land values. It could be called Churchbucks (like Berkshire Bucks etc.). LETS are a good, albeit locally limited solution to insufficient currency in circulation. They stimulate spending in the local community and create jobs and enhance productivity. If they were allowed to be used to pay taxes - as Churchbucks might be because the Church in Greece is state sponsored - they can become national currencies, suitable for payment of all debts and obligations. With over a billion Euros in land values, by one estimate in the Guardian, there would be a sound basis for a currency that should counter inflationary worries. Tell your local Orthodox Priest: "Support Churchbucks!"

But it’s not just the church sitting on unearned income: A property listing service aimed at foreign buyers lists this helpful table of property taxes to be expected in Greece:

- Immovable Property Tax: Every physical person or entity is obliged to pay an annual property tax of the ‘objective value’ of the property with the first €200,000 being exempt!

IF the ‘objective value’ exceeds the €200,000, then the follow(ing) is applicable: From €0 - €200,000: 0% From €200,001 - €500,000: 0.2% From €500,001 - €600,000: 0.3% From €600,001 - €700,000: 0.6% From €700,001 - €800,000: 0.9% From €800,001 and over: 1%

Even the highest value property pays just 1% of ‘objective value’ of the property, with the first €200,000 being exempt. The site continues:

Objective Value (of properties): the objective value of a property is calculated by the Government using a specific formula and is based on a price per square meter according to the location of the property.

So, locational value is accounted for, but the tax may still too low to capture the full rental value at the high end, as evidenced by the recent land bubble. If the full land rent was captured, there would be no basis for speculation as shown by this chart from Global Property Guide. House prices (read: land prices) remain depressed.

reece house prices

Although higher taxes are being collected now, the prices, which have dropped by as much as 45% for some luxury locations, have not come down enough yet. And of course, offshore tax havens – including New York City and London – are pulling millions out of the struggling Greek economy as well, often as a land-based money laundering scheme, according to a year-long investigative search by the New York Times. Says the Times:

Greek Mogul Dimitrios Contominas

Greek insurance and media executive arrested in January 2014 on charges that a loan intended for his business went to buy a London home for his daughter. Mr. Contominas denies the charges. His daughter lived at his Time Warner condo until he sold it last fall.

Land is still not being used efficiently, nor is it producing opportunity for the people. Collecting more land rent or alternatively, forcing these landowners to sell, would create jobs and opportunity, as well as show the EU, especially Germany, that Greece is serious about appropriate reforms. If the landowners will not pay, their lands should be forfeited, as would be the case for any other failure to pay property taxes. The only exceptions should be for those who are land rich but cash poor, or perhaps elderly, infirm, etc. in which case the tax can be deferred until the next owner and then collected at sale time.

Andy Mazzone further points out what ought to be obvious by now: that second tier European countries have no hope in competing with Germany or even most of Northern Europe, while on the same currency. Not everyone can be a net exporter; that’s simple math as well as basic economics.

But, now it is up to the fiery new Finance Minister.

As Angela Merkel said:

“Now is really the moment when Greece must say exactly what its ideas are.”

* The Land Value Tax differs from the property tax in that it is only a tax on the unimproved value of the land, including its locational advantages. Buildings and other improvements would be untaxed under the LVT to encourage development.

Editor's note: A related but different article with a similar title was published at OpEd News.

Also: Scott is now Managing Editor and Economics Editor at OpEd News.

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