Who would win and who would lose from Grexit?

Guest post by Tom Streithorst

Vladimir Illych Lenin may well be the most destructive political theorist of the 20th century.  His glorification of a conspiratorial party as agent of a glorious future legitimised mass murder from Bolshevik Russia to Nazi Germany to Cambodia's Khmer Rouge.  Nonetheless, he did invent an analytical tool political scientists and economists should use more often: “Kto Kovo”, or “who beats whom”.  In examining any policy, Lenin suggests the first question to ask is who gains and who suffers.

Neoclassical economics pretends that we search for an optimum solution that serves the economy as a whole. In truth, all change creates winners and losers. 

The most obvious example is currency appreciation.  If the dollar is strong and its value rises against the euro, then American tourists enjoy nicer vacations, able to eat and drink more luxuriously for less money, but American exporters pay the price.  The cost of their goods in euro rises, so unless they cut their margins they will sell less product.  The public generally favours a strong currency, thinking it demonstrates the vigour and vitality of the economy; but economists know a weaker currency can create jobs by increasing sales overseas, reducing imports relative to exports.

Inflation has a terrible reputation amongst the general public but for most it is relatively painless. If you hold your wealth in cash, inflation is your enemy.  If you own real assets, it doesn’t have to be a problem. For those of us who are net borrowers (and most of us are), inflation is beneficial in that it reduces the real value of our debts. That is why creditors despise it: inflation allows debtors to pay them back in depreciated currency. 

Keynes, in Essays in Persuasion, tells us inflation is beneficial to entrepreneurs, who must make their product before they can sell it.  Since their costs are in period 1 and their sales are in period 2, inflation increases their profits.  Net lenders, like banks and bondholders, are the most damaged by inflation. It is a sign of their dominion over economic debate that the public fear it as much as they do.
Inflation need not hurt workers.  The inflationary 1970s saw real wages grow more than they have in any decade since.  In the 1970s, wage inflation exceeded goods inflation, so most people were better off.  Today, with unions eviscerated and worker power a joke, goods inflation would probably not spark wage inflation.  That tells us that an inflationary spiral is almost impossible, but it also means that inflation today might not be as benign to workers as it was in the 1970s.

The economics blogosphere hates austerity as much as the average citizen hates inflation. Everybody but the ECB, George Osborne and the general public recognises that tax hikes and public service cuts reduce demand, slow the economy and increase unemployment.  Austerity in a stagnant economy is as sensible as bleeding a sick patient in the hope of extracting evil humours.  Austerity hurts workers and entrepreneurs. It slows the economy today and reduces investment for tomorrow. Why then is it still so popular? Partly it is because austerity, although wrong headed, does make intuitive sense. “When times are hard and families are tightening their belts, government must as well” is a snappy sound bite, even if contradicted by 80 years of macroeconomic knowledge.

Austerity, as historians of the IMF knowwell, is the creditors’ preferred policy in the aftermath of every financial crisis.  Creditors naturally want debtors to reduce their expenses so as to free up cash flow for debt service.  If you have borrowed money from your brother-in-law, he doesn’t want you to take a lavish vacation or aspire to an early retirement. Likewise, if a German bank is lending to the Greek government, it does not care if pensioners starve and civil servants lose their jobs as long as cash is made available to service the debt.

Bondholders are generally rich.  Rich people make most of their money from their investments, not from their labour, so rising unemployment has little effect on them.  Thus they are insulated from the costs of austerity. What bondholders fear is inflation, in being repaid in depreciated currency.  Increased government spending could be inflationary, and it could also damage the government’s credit rating, which would affect the value of existing bonds.

This may explain the popularity of austerity, even though it has been disproved both in theory and practice. Michael Kalecki remindsus that “Obstinate ignorance is usually a manifestation of underlying political motives.” The passion for austerity is not merely misguided. It persists because it serves the interests of the rentier class.

So far so simple.  Let’s try a trickier one. “Grexit” is terrifying. If it sparks contagion, it could plunge Europe and the world back into recession. Most pundits assume it would be an unmitigated disaster. But remembering Kto Kovo, it is worth contemplating who would suffer and who would gain from Grexit.

The most obvious loser is anyone with euros in a Greek bank. If Greece exits the common currency and replaces euro deposits with drachma, and the drachma inevitably falls in value, then the value of those cash deposits would plunge as well. No wonder the Greek middle class fears leaving the euro. Their savings, sitting in their bank accounts, would be devastated.

Of course, most rich Greeks have already shifted their euro deposits out of Greek banks into institutions in Switzerland or Germany. After Grexit, their euro holdings would remain constant while their drachma costs would fall. As Greek banks collapsed and Greek businesses struggled to access capital, some would inevitably need to sell assets to raise cash.  As a flood of middle-class assets hit the market, their price would collapse and rich Greeks sitting on euros would sweep in and buy them for a song. The rich who liquidated their Greek bank accounts in time could end up the big winners from Grexit.

Foreign tourists and investors would also gain from a weak drachma. Vacations in Greece would be cheaper, as would buying property and businesses. Increased tourism and more competitive exports would create jobs, lowering the 27% adult unemployment and 50% youth unemployment created by five years of austerity.

Greek pensioners and civil servants, hammered by austerity, would get a break. With Greece once again in control of its own currency, the Greek government would finally be able to enact a simulative monetary policy, and that should provide a boost to workers and entrepreneurs.

German workers, on the other hand, wouldn’t do well from Grexit, especially if other periphery countries followed suit. The value of the euro has been held down because of stagnation in the southern periphery. The weak euro has been enormously stimulative for Germany’s export sector. As the Eurozone shrank down to a German core and the euro rose in value, becoming more like a renascent Deutschmark, German exports would shrink and German jobs would disappear. 

German taxpayers would also lose. The money they lent Greece, or more accurately the money used to buy Greek debt previously owned by German and French banks, will probably never be paid back.  Which reminds us of perhaps the biggest winner of all.

Every financial crisis ultimately is caused by creditors lending more than borrowers can repay. Both borrowers and lenders hope to make the other shoulder the cost of that imprudent lending. Had Greece defaulted and left the euro in 2010, the German and French banks holding their debt would have failed. The austerity of the past five years was the price of shifting debt from private sector banks on to the balance sheets of public institutions. German taxpayers have taken the hit - but German banks have not. Perhaps that helps explain the last five years.

In 1931, speculative pressures drove Britain off the gold standard. Losing the time-honoured link between sterling and gold was seen as unthinkable and terrifying. But historians now tell us that leaving gold, allowing Britain to run an independent and stimulative monetary policy, was the key to Britain’s recovery from the Great Depression. All over Europe, unemployment reduced and growth started in countries that left the gold standard and regained control of monetary policy. Perhaps Grexit would do the same for Greece today.

Tom Streithorst is an American in London who has been writing for magazines on both sides of the pond since 2008. He is currently working on a book on post scarcity economics.

Image is courtesy of Jean-Pisani Ferry. 


  1. "For those of us who are net borrowers (and most of us are)"

    And this is the problem.

  2. Thank you (and Frances for hosting).

    I have a vague feeling that the average German worker (say the clichéd Mercedes factory worker) has not really gained - they've worked hard on relatively low wages, not taken fancy holidays in Greece, while Mercedes shareholders have taken fat dividends. But now all Germans (not just the Mercedes shareholders) share the pain of a Greek default.

    Is my view completely wrong?

    1. Hi Luke

      I'd say you're right about the German workers - they wouldn't do well out of a Greek exit.

      However, it's wrong to blame the Greeks. The transaction here was between the German government and the German banks. The banks were in trouble, so the government bought some of their dodgiest assets at inflated prices to help them back on their feet. Now those assets are going sour - which we always knew they would - the government is paying the price.

      So Greece has had ups (when it joined the Eurozone) and downs (the last five years) and will probably end up somewhere decent, but only after a torturous journey.

      The German public have worked hard, but seen their tax money wasted buying loans which have always looked worthless.

      And the German banks messed up, but instead of being loaned some money to recover, and instead of having to go 'austerity' to sort themselves out, they were given a free bailout.

      Of course it's more complex - it would have truly hurt the Germans to let their banks go bust! - but the German public was committed to losses from the day their government overpaid for Greece's debts.

    2. Luke,

      You ask

      "Is my view completely wrong?"


  3. Here's somebody else who would lose: the Greek people.

    Greece imports several critical goods: food, medicine, fuel. It's logical to assume that for a long while it will be unable to borrow in foreign currency. At the same time, the gains from currency devaluation are uncertain and hard to quantify (for example, nowadays tourism faces stiff competition from nearby countries that all have their own currencies), while the efforts to boost critical sectors of the economy (like agriculture) will take time to bring results.

    Above all, judging from Greece's recent history of monetary independence (I speak as a Greek), it's safe to assume that Greek politicians will return to their old habits of budget-deficits that finance clientelism rather than a vibrant economy.

    Who stands to lose then? The Greek people, first through poverty and critical shortages, and then through suffering the effects of political patronage (as we did when we had the drachma).

    1. Conservation by other means ....

    2. The system of political patronage did not end when Greece entered the eurozone. For the most part, unchecked political patronage ended with a public organization created for ranking public service candidates (ASEP). The kinks in that system -and they were kinks, by and large - did not diminish with the advent of eurozone. Moreover, public overspending if anything BALLOONED under the euro. Have you seen any of the economy stats? Additionally, the notion that Greeks need the iron fist of other countries -even at the price of an imploding economy- in order to settle their house is uniquely.... colonialist, if not outright racist. It amazes me that a good percentage of Greeks (particularly most well off and the right-wingers) subscribe to such uninformed and frankly medieval views.

  4. "Every financial crisis ultimately is caused by creditors lending more than borrowers can repay."

    And the borrower may be unable to repay because the creditor is not inclined to buy anything from the borrower.

  5. All economic measures work & work well when applied to the right problem,the problem with humanity is that it is arbitrary applied across nations or continents like cancer treatments killing good & bad cells & hoping the patient survives,this only happens because of protectionism & power for in any set circumstances a set of principles is applied & written into law like the bill of rights or human rights act most of this human made problems could not be stopped they could be tempered or evaded to the point of causing a humanitarian disaster


  6. Greece now must borrow in a foreign currency -- the euro. When it shifts to drachma or something else, it will still have to borrow in a foreign currency. Greece and other European countries are not sources of organic credit. They lack the infrastructure including strong banks. Frankfurt is the credit provider for the EU, after the Grexit the credit provider(s) will be Wall Street (dollars), City of London (sterling) or Frankfurt.

    A strong bank shifts its losses into the economy as a whole while keeping profits for itself: Chinese banks are strong so are German banks. Greek banks most resemble Argentina's. These banks are forced to absorb their own losses, lurching from bailout out bailout. If European (German) finance cannot bail out the Greek banks certainly the Greeks themselves will be unable to do so.

    Greece is the poster child for long-running policy errors: the greatest being repeated efforts to industrialize which invariably end in disaster, the other being the central bank making unsecured loans. As it does so it becomes insolvent which in turn triggers bank runs.

    Any two countries possessed of the same material advantages … where one possesses the instruments of credit and the other does not … the first country will industrialize while the second will depend upon the credit of the first and become its subject. This is what has been happening across the eurozone. Absence of organic credit provision is why nations are unsuccessful at modern development.

    Without organic credit Greece & Co. are dependent upon overseas loans. Inflation/currency depreciation has been persistent across Southern Europe because private banks are historically weak and unable to pass costs onto others. The banks cannot provide the credit needed to meet politicians’ delusion of grandeur, partly because credit by itself is unable to provide anything real. To gain credit, countries import euros while central banks are called upon by leadership to supplement the commercial banks’ unsecured lending with their own. The outcome is vanishing lenders of last resort, systemic insolvency and runs. Repeated cycles of (hyper)inflation, bank runs and crises pulverize the banks … which are able to recover somewhat with more outside loans … only to collapse when the crisis re-emerges a few years later. Countries such as Greece cannot free themselves from dead-money debts or develop as they wish.

    Banks are weak because managers are cronies of government elites, other interests are ignored, or worse. Unsurprisingly, citizens don’t trust the banks, they do as much of their business as possible with cash and hold savings in the form of real estate or other hard goods that cannot be easily stolen or replicated into worthlessness. Like most countries with inflation problems, Greece has been in a frenzy to develop, to ‘get rich quick’, to become industrialized.

    Greek lenders have one foot out of the country, together they represent the transmission channel for foreign currency (euro) loans. The returns on these loans are appealing to yield-starved overseas investors while spreads are positive for lenders. The pressure to lend in euros and other foreign currencies is unrelenting. The outcome has been foreign currency flows into Greece followed by droughts as locals, outside speculators and the lenders themselves remove the funds out of harm’s way as fast as they can.

    When euros become scarce, Greeks cannot refinance maturing loans. Firms and citizens compete with each other to gain euros, the contest crowds out commerce and becomes the country’s entire economy … which becomes the big reason why Greece’ central bank makes unsecured loans in the first place = vicious cycle.

    Greece needs stringent energy and resource conservation, it needs to wean itself from loans, free lunches and stupid industrialization. It will, one way or the other, live within its means, so will all the other economies of this world.

    1. Did you read the article? In what way is this some sort of discussion?: it looks like an anti-Greek polemic to me, casually posted here.

  7. "If Greece exits the common currency and replaces euro deposits with drachma, and the drachma inevitably falls in value, then the value of those cash deposits would plunge as well."

    I may be naive but I do not understand this. Let Greece introduce Drachma and then revalue the euros in the account in drachma. Is it necessary to be in the ratio of 1:1.

    The advantage is there would be no run on the banks, and those guys who withdrew the euros are not at an advantage.

    Why is this idea a non-starter?

    If at all anything the inflation that can accompany introduction of drachma might have to be feared more.


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