Wednesday, October 7, 2015

Greece's True Plan B

Much publicity has been given to Yanis Varoufakis' Plan B of last July even though that wasn't really a Plan B. All it was was a mechanism to create a pseudo Euro liquidity during a time when the ECB and EU would have cut off their funding. It was not a plan to return to the Drachma even through a return to the Drachma would have been its likely consequence.

The true Plan B was quite different from Varoufakis' 'creative Euro-printing'. It was titled "A program of social and national rescue of Greece" and it was prepared by Costas Lapavitsas and Heiner Flassbeck. It consists of 37 pages text and another 10 pages of appendices and references.

This true Plan B is worth reading because I would not rule out the possiblity that it may be used at some point in the future. Certainly if Greece fails with the current program, a return to the Drachma will become a very likely alternative and once that happens, the above Plan B will be one course of action to be considered.

Plan B starts with a premise which is most important but, nevertheless, wrong. Plan B argues that, after Greece has stopped servicing its entire foreign debt, at least 10 BEUR will no longer be necessary for debt service and can be used for other purposes (such as alleviating austerity). Regrettably, there will not be 10 BEUR+ freed because Greece's entire debt service was only half of that in 2014; to be exact: 'only' 5,7 BEUR. And some of that 5,7 BEUR was due to domestic creditors which would continue to be paid under Plan B.

More than half of the 5,7 BEUR was paid to the IMF on its very expensive loans and to the remaining private creditors. If Greece renegotiated rates with the IMF and found a way to prepay the private debt, the same result as conceived in Plan B would be achieved without breaking so much glass.

The key section of Plan B is titled "Confrontational exit from the EMU" which outlines 29 different measures to be taken. When reading those measures, one gets a bit cold sweat on one's back because some of them are really adventurous, to say the least. However, one is well adivsed to study this Plan B because, by and large, things are likely to unfold that way (or quite similar to it) if and when Greece were to give the Euro the shaft.


  1. I find Lapavitsas much more interesting that the other usual "Popular Unity"speakers.
    He even was clear talking, back in January in BBC HardTalk, about the uncertain strategy of Syriza, especially for the negotiation with Europe and IMF

  2. I have not read his plan, but from your comments, he plans to stop debt repayments to foreign lenders while maintaining them to domestic lenders.

    I believe this is in contradiction with the treaty of Rome, so would mean an exit from Euro and a major clash that would lead to an exit of EU as well.

    A soft speaking fellow who advocates in fact extreme solutions.

  3. The confrontational exit route does not take into account of the "Montenegro solution", keeping the Euro as a currency, but leaving the monetary union.

    The only thing which Greece would need to do is to declare its Central Bank to be independent from the ECB. No need to start its own currency.

    Of course Greece could not devalue then, (one Euro in Greece would still be the same as one Euro in the rest of the EU). But the benefit would be it could keep the currency which the Greeks want to keep, kick out the Troika once and for all, and be completely independent from the EU.

    As far as finances are concerned, the EU structural aid and agricultural budgets would be in danger (especially if all debt service to the EU is stopped). Against that the debt service (Euro 5.7bn) would be saved.

    In a paper such as the 37 pages published, the Montenegro option should be discussed.

    Here my discussion how it would work.

    1. My understanding is that there are several countries besides Montenegro which also use the Euro as their currency just like there are several countries which use the USD as their currency.

      I don't see what problem the "Montenegro solution" would solve. Greece could still not print the Euro and a country which cannot print the currency which it uses is not financially sovereign. If the situation gets tight, the country needs to borrow that currency and when it borrows it loses sovereignty. And should it refuse to borrow, it won't be able to pay its bills.

  4. Quite so, they would loose sovereignty, provided there were lenders they could borrow from.

  5. Thanks for the link, I have read other of Lapavitsa's papers but this was by far the most interesting.
    The first 30 pages are mostly German bashing, but there are some pearls as well.
    On economy:
    "Since the 2000s and up to 2007-9 the Greek economy performed remarkable well".
    It is accompanied by a graph that shows an increase in GDP of 38% from 1999 to 2007. The productivity was falling in the same period.
    My controller (CPA, not economist) on a project would tell me that I was 3 month behind schedule, but had used the budget for the next quarter. The Steering Committee would tell me that my performance was poor, in capitals.
    "In the German view, the Greek economy was already performing poorly before the outbreak of the crises in 2008; Greece apparently existed in a bubble of easy credit, widespread corruption and persistent tax evasion, while all Greek citizens lived beyond their means. However, all these arguments are entirely flawed".
    "The mere existence of widespread corruption in Greece could never have caused a crash in economic output".
    Today's Kathimerini stating corruption causes annual losses of BIO 33.
    "But even widespread tax evasion could not possibly lead to the collapse of the economy".
    Today's Karhimerini stating known outstanding tax fraud cases of BIO 15.
    On national perception:
    "To ensure the provision of public goods and services required for the attainment of the economic, social and cultural rights of Greek citizens".
    Poor US Americans, they only have the right to PURSUE happiness.
    "Staying in the EMU Greece would be an insignificant pariah in international affairs".
    No doubt they would be the darling of the world after defaulting.
    On strategy of negotiation:
    After having changed to Drachma and stopped payment of all debt, "Greece would also request a conference to achieve the restructuring of its national debt. The government should finally declare that any threats against Greece would have serious consequences for Greek membership of EU and NATO".
    When Schauble proposed a swap of Greece for Puerto Rico to Obama, the answer was no. But surely this will teach them?

    The film ends in bliss. The change has been carried out without pain. Greece is free of debt and the EMU. It is still in the warm womb of the EU, with all its benefits. The landscapes are blooming in Arcadia, where they live in splendid isolation. I have a different take on it, where 2 days after the declaration of the new workers paradise there is nothing in any shop, where Greece has been converted to the largest black market in the world, where the 40 billion EUR sloshing around in cash is playing havoc for the 20% who are really poor.
    Please read it all of you, it's well worth it.