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The Economics of the Greek Crisis and Its Economic Solution
Raymond Richman, 7/15/2015

Greece has been portrayed as a country living beyond its means and the recommended corrective action is for Greece to consume less, a policy of austerity. The world faced a similar crisis in 1930 and the Keynesian solution was for governments to spend more, not less. Greece could not spend more even though the Greek people voted against a policy of austerity because it does not have the money to spend more. It needs Euros and Germany will not lend it any Euros until it agrees to tighten its belt. It is caught between Scylla and Charybdis. Prof. Peter Morici of the University of Maryland has a solution for Greece. In a column published July 13, 2015 in the Pittsburgh Trib-Treview, he calls on the Greek Parliament to reject the $86 billion bailout, offered by Germany, dump the euro, and reintroduce the drachma.

Prof. Morici castigates German economic policy as mercantilist, which is true, writing that “Germany and its northern neighbors pursue growth strategies premised on exports – in particular, running trade surpluses.” This mercantilist policy is often called a “beggar-ones-neighbor policy. Germany has employed the policy not only against its Eurozone neighbors but against the USA as well. According to the US Bureau of the Census, Germany’s trade surplus with the US amounted to $74 billion in 2014. Its trade surplus with the world was $250 billion, exceeded only by China. Germany ran a trade surplus every year with Greece and many other Eurozone countries, principally its Southern neighbors from 2002 to 2014, including Portugal, Italy, and France. Mercantilist policies promote employment and prosperity in the trade surplus countries and unemployment and slow growth in the trade deficit countries.

Unfortunately, Greece does not have the wherewithal to return to the drachma. It would need money that has a known purchasing power, like a Euroloan of some billions of Euros. But there is a solution.  

Countries on a gold standard (or a Euro standard) have long been told by economists that the way to deal with a chronic trade deficit is deflation or austerity and in the surplus countries inflation or stimulus spending to change the gold content (or the Euro content) of their currencies to produce a trade equalizing rate of exchange between their respective currencies. The Euro countries are on a fixed rate standard like the gold standard. Under a gold or Euro standard, the only way to restore what balanced trade was deflation or austerity on the one hand and inflationary spending on the other. (And the Euro founders thought they were onto something new!) So Germany recommends austerity for Greece and continued mercantilism for itself.

European and US economists, except for ourselves, failed to recognize a third possibility, currently against the rules of the Eurozone but probably legal under World Trade Organization rules, which would not only save Greece but save the Eurozone. That is, to allow any Eurozone country experiencing chronic trade deficits with other members to impose the Scaled Tariff, a single-country-variable tariff whose rate increases as its trade deficit widens and disappears as it nears a trade balance with a particular partner. While the tariff is in existence, the country will earn euros – oh, joy! (For more on the Scaled Tariff read our book Balanced Trade (Lexington Books, 2014.) We’ve recommended that the US impose such a tariff on imports from China, Germany, and Japan to close its chronic $500 billion trade deficit.

We recommend that countries in the Eurozone be permitted to levy a Scaled Tariff on imports from a member country so long as a significant chronic trade deficit exists with that particular trading partner.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]