This article by Dimitris Kontogiannis addresses the problem of the continuing drain of deposits in Greek banks. Mr. Kontogiannis suggests that raising interest rates will increase bank deposits and, as an indirect consequence, reduce the current account deficit because of less consumption. My reaction? Good luck!
What we have seen in the last 2-3 years is a complete confidence crisis regarding Greece. Foreigners lost confidence in Greece and withdrew their financing, and Greeks themselves lost confidence in their banking system and in the government’s policy to adhere to the Euro. Should Greece exit the Euro, depositors would lose much of their wealth. Should a Greek bank go bankrupt, depositors would probably lose all of it.
Such a crisis of confidence cannot be overcome with higher interest rates. At the same time, the drain of funding for banks must be brought to a halt. If not, the ECB will become the exclusive funder of the Greek banking system at the end of the day. Learning from other countries in similar situations, the only alternative is to temporarily freeze bank deposits.
Freezing bank deposits is nothing other than to force a situation which would normally happen naturally, i. e. that deposits stay in banks. The deposits retain full value and they continue to receive interest. They just can’t be withdrawn for a limited period of time.
The current account deficit benefits only temporarily from less spending. As soon as spending goes up again, so will the current account deficit. Why? Because it is a structural one. Greeks buy abroad because these products are not available domestically or, if they are, they are much more expensive. This is why Greece is overspending so much, a trend whichmust be brought to a halt, too.
The current account deficit is improved by radically curtailing imports through domestic import substitution wherever possible. If the latter needs some start-help, special taxes on imports can be implemented.
Finally, Greece must start an export drive. A national consensus must be developed that imports hurt the country and exports help it. The import lobby needs to be weakened and the export lobby strengthened.