Sunday, July 19, 2015

Easier than you think: How to devalue the Greek Euro

It's more-or-less universally agreed that if Greece still had its own currency, devaluation could help the country recover from its current economic depression.  It's also agreed that, lamentably, this is not possible without Grexit.

But there may be a way.  Consider:  devaluation works by raising the prices of imports (in the local currency) while reducing the prices of exports (in foreign currency).  That is, a devaluation acts like a tariff -- a positive tax on imported goods and services and a negative tax (i.e. a subsidy) on exports.

Do you know what else acts like tariffs?  Tariffs.

So if we want to emulate a Greek currency devaluation, we could simply impose a tariff on Greek imports and dedicate the revenue thus collected to export subsides.  (And yes, it would probably be a good idea to have an outside entity involved in collecting and disbursing the money involved, rather than relying on local authorities.)

Now, like any option that might actually help the Greek economy (and, by the way, increase the probability that Greece's creditors will someday be repaid), this strategy will undoubtedly be ruled UNTHINKABLE by the Wise Old Heads of Europe.  (Aside 1, Aside 2).

Of course, the real fun to be had by tabling a proposal like this would be to watch German politicians complain that a tariff along these lines (especially if it might be generalized to other depressed debtors in the  Euro zone) would hurt German exports.  (For an explanation of why this is so funny -- and it is -- see Aside 3.)

(Aside 1)  The EU appears to have bred its own special variety of Very Serious People for which we need a name.  I'm proposing "Wise Old Heads of Europe," or WOHEs for short.

(Aside 2)  The correct response to anyone who tells you that something is "unthinkable" is, of course, "Think harder."

(Aside 3)  For any particular country, net lending equals net exports.  Borrowers run trade deficits, lenders run trade surpluses.  (This is neither theory nor observation; it is an accounting identity, true by definition.)  Therefore, for Germany to "collect on its debts," its trade surplus must suffer.  So the ostensible goal of German policy towards Greece an other Euro debtors has always been to hurt German exports.  The difference is that the direct application of tariffs might work.


  1. Even better if we generalised the proposal by imposing tariffs on imports in all afflicted eurozone economies and used the funds derived to directly buy back debt.

    The Germans would really love that....

  2. Agreed. I advocated tariffs on my own blog on 5th July. Plus it was advocated by Heiner Flassbeck on the 4th. See respectively:
    The only objection I’ve seen is the blindingly obvious and boring point that tariffs are not what the EU is about, a point which I dealt with in any case in my article.

    1. Ralph: thanks for the references!

  3. and differential inflation? you have to cut salaries otherwise..

  4. and differential inflation? you have to cut salaries otherwise..

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  6. JEC

    Given that Germany's economy depends on foreign demand for its exports, reducing that demand would presumably cause problems for the German economy, no?

    The reduction in export revenue would lead them to cut prices and/or reduce spending, investment etc.

    1. Increasing demand in Germany is easy: it can increase it’s deficit and/or the ECB can cut interest rates. That would tend to increase demand in the periphery, which would help a bit.

      The whole problem is that at the moment demand cannot be increased in Germany, at least not by much, because over the last five years Germany has hit the target rate of inflation. However inflation has dipped there to nearer zero of late, as it has in the UK and elsewhere. Thus a bit of extra demand in Germany would be in order whether Greece devalues or not.

    2. Germany could also do measures like hike the minimum wage, increase employer pension contributions, jack up the carbon tax and offset it through a income tax deduction or a host of other subsidy initiatives. It's unfortunate that we have spent so long brainwashing people into thinking of political economy in terms of "you can't subsidize that, there is a hidden expense" that now when we finally want higher labor prices or demand such measures are reflexively off the table.

    3. Philippe: That's an interesting question. Given Germany's current prosperity, it's easy to forget that the Euro area is still at the zero lower bound. Conventional monetary policy is already as stimulative as it can be. And the German government (and political elite, and general public opinion) is far more committed to fiscal austerity as the cure for all ills macroeconomic than, say, the Conservative government in the UK.

      So, yes, I'd agree that there's a very real risk that "re-balancing" export (and capital) flows would simply move the demand shortfall from one country to another. This is really just a version of the problem of competitive currency devaluation, which does become a beggar-thy-neighbor policy at the ZLB.

      What makes this a very interesting question indeed is that the same logic applies to *any* "re-balancing" within the EU. That is, any re-balancing poses a risk of recession to Germany (or, more generally, the "core").

      It does turn out to be rather convenient that the no-tariff EU combined with the fixed-exchange-rate Euro area has allowed Germany (et al) to "export" the entire European recession to peripheral countries like Greece and Spain. Well, convenient for the core countries, anyhow.