The Jobs-Currency Connection in Greece

Negotiations between the Greek government and its international lenders were finally resolved last week, after seven long months. In January, Prime Minister Antonis Samaras made a celebratory announcement projecting a small, 2013 primary budget surplus of 1.5 billion euros. Also recently announced: European Union co-funding for a long-delayed 7.5 billion euro road construction project in 2014.

Sounds good. No reason to suggest that Greece needs an extreme monetary makeover right now, is there? Yes, there is. Talk of a recovery isn’t just premature, it reflects a complete fantasy. For starters, at today’s rate of net job creation Greece won’t reach a reasonable employment level for more than a decade. That’s too long.

An alternative domestic currency could be the basis for a solution. A parallel currency that was used to finance a government employment program would provide a relatively quick restoration of a lost standard of living to a large fraction Greece’s population. We reached that conclusion at the Levy Institute after modeling multiple scenarios based on the narrow range of available options.

Here’s the context that makes such a radical move rational: The failures of the current strategy have been so great that even a total abandonment of austerity programs now would provide relief only at a very slow pace. A modest increase in government spending like the infrastructure project, while the right approach, isn’t nearly powerful enough to fuel a turnaround; once it’s finished the economy will contract again. And the primary surplus stems from conditions unlikely to be sustained: dramatic spending cuts, higher taxes, and a one-off return of earnings by European central banks on their holdings of Greek government bonds.

Bank lending is down (by 3.9 percent), real interest is up to its highest rate since Greece joined the European Monetary Union (8.3 percent), and price deflation has set in. Unemployment just reached a new high of 24.9 percent for men, 32.2 percent for women, and a breathtaking 61.4 percent for youths. Even the shots at reducing the debt to GDP ratio, the foremost priority of Greece’s creditors, have been spectacular misfires. It has risen from 125 percent at the crisis onset to 175 percent now.

To repair Greece’s position, numerous ideas have been floated for a currency that would function alongside the euro. Proposals have been termed everything from ‘government IOUs’ to ‘tax anticipation notes’ to ‘new,’ ‘local,’ or ‘fiscal’ currencies; most visibly, Thomas Mayer of Deutsche Bank coined (so to speak) ‘geuros.’ Some plans envisioned an orderly exit out of the euro. Most shared the perspective of the troika — the European Central Bank, the European Commission, and the International Monetary Fund — that export-led growth through increased price competitiveness and lower wages is central to solving the problem.

Our policy synthesis fundamentally differs from those views. We see Greece remaining in the Eurozone and initiating a parallel financial system that, most importantly, restores liquidity in the domestic market.

Why not stress exports? Price elasticity in Greece’s trade sector is low, our analysis shows, which explains why there hasn’t been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.

That should be the focus in Greece, too. We modeled a parallel financial system that would stimulate demand by financing an employment guarantee program known as an ELR; the government serves as the Employer of Last Resort. It would hire anyone able and willing to work to produce public goods. Wage levels would be low enough to make private employment more attractive, but high enough to ensure a decent living standard. The program would be financed by a government issue of a parallel currency… call it the geuro.

Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.

The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.

Foreign trade would still require euros, which would remain in circulation, and Greece’s private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.

In our simulation, 550,000 jobs (and many more indirect ones, via a sensible fiscal multiplier) would be created at a net cost of 3.5b geuros per year. The infusion would contribute a 7 percent GDP increase, and there would still be a sizable euro surplus. As with any fiscal stimulus, the overall deficit would increase and there would be a deterioration in the balance of payments, although a manageable one.

Restoring domestic demand needs to be Greece’s economic policy emphasis. Despite any downsides, a parallel currency that supports an employment guarantee program would be a U-turn towards rebuilding the population’s purchasing power — and rebuilding Greece’s ravished economy.

This article originally appeared on EconoMonitor on March 24, 2014, under the title "The Currency/Jobs Connection in Greece."