In the previous post, we explained that Greece’s monetary problem is rooted in its fiscal problem which is in turn rooted in the Greek government receiving too many loans used for too much unproductive spending.
We then explained that austerity and high taxes are mercantile solutions which work well for businesses but not for society. If a business is in trouble, it can simply lay off or remove excess workers. But if a society or family is in trouble, it cannot remove its citizens or family members by forcing them to go overseas or to die from disease or suicide. Instead, society or family members naturally share the burden for the sake of the well-being of the collective, something that would not make sense among competing businesses.
While we point the root cause to over-borrowing and over-lending, some have extended the root cause to the idea of a European Union itself. This is as nonsense as to say that since car crashes are ultimately caused by riding cars, then the best solution is to stop using cars. Some have attributed the cause mid-way, to the lack of fiscal enforcement within the EU, and so the long-term solution would be a fiscal union. This is similar to enforcing standardized road rules in our car example. We shall discuss this in our future posts.
For now, we focus on solving Greece’s monetary and fiscal problems based on Adam Smith’s maxims.
The Greek government’s rush to become as rich as its EU friends caused it to ‘overtrade’ debt or to over-borrow, resulting in the lack of money. This ‘lack’ worsened its recession because government spending makes up a lot of Greece’s GDP.
Because of this, we shall split the first solution into a monetary part and a fiscal part.
The natural response to the shortage of money is to barter or to pawn real things for money or other real things. Nominal value can vanish, but real value always remains. In Greece’s case, though the nominal value of its government in the short term is small (for example, its remaining annual cash is not enough to pay annual pensions) and the nominal value of Greek society is small (its GDP and money supply has shrunk), the real value of Greece is still big as it is a developed economy. Greece should therefore pay its foreign debt in real value, or in kind, to stimulate its economy while reducing its debt. This solution is derived from the last chapter of The Wealth of Nations, after Smith explains the many ways the pernicious merchant-induced national debt can be reduced:
Instead of the Greek government using its own precious euros to pay the debt, it could be paid by the euros of foreign merchants or businesses directly into the creditors. By paying its taxes in kind, such as in fruits, Greek production can be increased while giving more rude produce for the Germans either for selling or for further processing. $17 billion in exports to Europe can translate to $3.4 billion tax payments at 20% tax, all directly and immediately going to the creditors.
We then extend this idea and suggest that Greek imports from the EU worth $17 (out of $30) billion be paid by Greek exports to the EU worth $17 billion through a European clearing union (ECU). If successful, this can prevent the need for billions of Greek euros to be sent overseas to pay for imports, as only $13 billion will be needed. The saved euros can then be kept in Greek banks to keep them solvent and to pay wages and pensions, reducing the amount needed for the bailout, which in turn reduces the austerity needed.
A Greek exporter sends fruits out to a German retailer
Although both the old way and this new way of payment will result in the same net amounts of cashflow, with this new way, Greece can theoretically keep its $17 billion worth of euros at all times, whereas in the old way, Greece can have zero euros for a certain time while waiting for their cash inflow from their exports. Although $17 billion worth of saved euros seems small compared to the current $370 billion debt and even the $16 billion dollars worth of euro interest payments, those values are based on a shrunk Greek economy.
Since the root of the whole problem is the lack of euros, the saving of such euros, by keeping them in Greece all the time, will enable Greek industry to pick up by conserving its life-blood. With this small but essential transfusion, the Greek economy can naturally circulate and accumulate it gradually to overcome the burdens imposed by the bailout.
This solution tackles the lack of euros (monetary problem) in the Greek economy by reducing the outflow of euros.
To Smith, a high budget deficit does not automatically indicate poverty, because the net revenues might be higher. What is important is that the spending is not wasteful. The Troika introduced austerity packages to reduce wasteful spending while increasing taxes to hopefully increase revenue. Despite these, tax evasion and tax shortfallsstill occur.
It’s not surprising that self-employed Greeks are said to be the top tax evaders since their earnings are regarded in socio-economics not as ‘wages of labour’ but instead as ‘profits on capital stock’, which can be hidden, and thus must be either taxed more moderately, or put under stricter tax rules.
But his whole capital stock is almost always a secret.. Nations have taxed profits with a very loose, arbitrary estimation, instead of any severe inquisition. The extreme inequality and uncertainty of a profit tax assessed loosely can only be compensated by its extreme moderation.
High taxes frequently afford a smaller revenue to government than moderate taxes by reducing the consumption of taxed commodities.. When the reduction of revenue is caused by the reduction of consumption, the only remedy is to lower the tax.Simple Wealth of Nations, Book 5
Only the strongest bodies can live and be healthy under an unwholesome regimen. Only the nations that have the greatest natural and acquired advantages in every industry, can prosper under such taxes. Holland has the most taxes in Europe. Yet it continues to prosper despite of them and not because of them.Simple Wealth of Nations, Book 4, Chap. 2
The austerity measures are like medicine fit more for stronger countries like Germany than weak countries like Greece. We therefore advocate lower income taxes and VAT to combat tax evasion and to raise consumption. We also recommend a gradual phasing in of austerity cuts and other tax increases, instead of imposing them suddenly, so as to give more time for Greeks to adjust.
To raise regular revenue, we suggest strengthening one of Greece’s most important natural and national asset: tourism. One way to do this is to build on or re-use the infrastructure of the 2004 Olympics and make Athens a permanent olympic site, since Greece was the original birthplace of both ancient (Olympia) and modern olympics (Athens, 1859). This will generate a regular revenue stream which can be used to help pay off the debt.
Having a permanent Olympic site such as Athens can disburden other countries from spending large amounts of money for building their own olympic and sports venues, which are often corruptedor even set up in unnatural places. In this way, Greece can build on its natural and acquired advantages as a top global tourist destination, just as German policies build on Germany’s natural advantages as a top destination for advanced manufacturing.
Another way to encourage tourism to Greece and to other Mediterranean countries, such as Spain and Italy, is for the EU to promote tourism in the south. This can be done by advertising and by policies that encourage Northern Europeans to take a vacation there. In effect, such policies can be treated as subsidies to support tourism, and operates in a similar way to what Smith called bounties on production, which oblige the stronger European countries to support the weaker ones for the sake of the stability of the Eurozone: