Greece, and History Lessons

By Bennhold, Katrin | International Herald Tribune, May 22, 2012 | Go to article overview

Greece, and History Lessons


Bennhold, Katrin, International Herald Tribune


If Greece makes it through the current political crisis and stays in the euro zone, one useful case study is Germany's reunification, which suggests that the adjustment could take decades.

The decision to suspend Greece from the common currency became inevitable when it emerged that Athens had fiddled with the accounts yet again amid chronic economic weakness, forfeiting what credibility in the international arena it still had left.

That was in 1908.

After diluting the gold content in its coins, Greece left the Latin Monetary Union, whose founding members also included France, Italy, Belgium and Switzerland. More than a century later, history may repeat itself, albeit in vastly different circumstances.

From the dual currency economy of 14th-century Florence to the monetary union of Austria-Hungary and Argentina's abandoned dollar peg, the past is littered with examples of countries' weighing the costs and benefits of different monetary regimes.

What can history teach us about the options still left for a euro zone pulled apart by divergence between a competitive core and an uncompetitive periphery; arguments about austerity versus stimulus; and the increasing gulf between those advocating to keep Greece inside the club at all costs and those lobbying for an exit?

If Greece makes it through the current political crisis and stays in the euro zone, one useful case study is Germany's reunification, which suggests that the adjustment could take decades, not years, and involve mass emigration, billions of euros more in fiscal transfers and the rise of fringe parties in Greece as well as in the countries that have to foot the bill.

Like the former East Germany, Greece suffers from a crippling competitiveness gap and is locked into the euro. East Germans were priced out of the labor market because the value of the Deutsche mark reflected Western, not Eastern, productivity levels. About 14,000 businesses were shut down and four million jobs lost in the first five years after formal reunification, in 1990. Unemployment eventually peaked at more than 20 percent in 2005.

Since the fall of the Berlin Wall, in 1989, more than 2 million of the 16 million people living in the East have moved West. Long- term unemployment and wage depression bolstered xenophobic parties and the Left Party, which grew from the former East German Communist Party and hopes to reach the national government in 2013.

More than two decades later, living standards have converged, although they remain about 20 percent lower in the East with unemployment in the Eastern part at nearly twice the Western average.

And this was within one nation with the same language, perfect mobility and the fiscal transfers missing in the euro zone: German taxpayers financed more than EUR 1.7 trillion, or about $2.17 trillion, at current exchange rates, with the "solidarity surcharge" to pay for modernizing the former East Germany.

"If Europe does for Greece and potentially other peripheral countries what West Germany did for East Germany, it will cost dearly, politically and economically," a senior European diplomat said, speaking on the condition of anonymity because of the sensitivity of the issue.

But if it does not and Greece leaves the euro zone, the diplomat added, the cost could be even higher. Past breakups of currency regimes led to messy transitions, often involving bank runs, capital flight, emigration and some measure of default.

When Austria-Hungary collapsed in 1918, after World War I, and with it a currency zone covering part of today's euro zone, the new governments of the region created national currencies by simply stamping the Austro-Hungarian krones circulating in their country with a national marking. Armed troops patrolled the borders to stop people from ferrying krones to the country they thought would have the strongest currency to get the most valuable stamp.

In 2012, much of the conversion back to Greek currency, the drachma, would happen electronically, during a banking holiday that would temporarily freeze online transfers out of the country, but the borders would still have to be sealed to prevent people from smuggling euros out of Greece after the devaluation has taken place, an awkward undertaking in postwar Europe. …

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