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Tuesday, June 19, 2012

What Greece Should Do To End It's Problems

I put this on John Redwood as a comment but had been thinking of doing something here as well so this seems the time. The big point is that what matters is whether the real economy is growing or not. Printing money and lending it to ourselves is just a cosmetic exercise to hide the basic economic failure. When we know that 10% growth has been achieved continuously by countries that are not that well run (China, India) it is clearly not only possible but relatively easy for Greece and indeed us to do at least equally well. Ig the political will is there.

John had pointed out that the lending to Greece had been predicated on the assumption that, in 2014, the Greek economy would turn round into significant growth and that the EU had never produced any credible reason for the assumption. I start by answering this.
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The “assumption” that the Greek economy is suddenly, with no change in circumstances, going to turn round from 5 years negative growth to strong positive growth is merely the latest equivalent of the EU printing money and using it to “solve” the previous crisis’s. Printing money is equivalent to kiting cheques in the expectation somebody else will pay. Assuming non-credible growth is kiting a cheque and assuming the next generation will pay.
In fact Greece could get into the 6% growth the non-EU world is averaging & it is quite obvious how. Repeal all the EU regulations that restrict growth. Reintroduce the drachma and let it fall to it’s natural level.
“all that is required to lift a nation from the lowest barbarism to the greatest wealth is peace, easy taxes and the tolerable administration of justice” Adam Smith
There are 2 problems but both contain solutions within themselves. Firstly I do not think the euro would cease to circulate in Greece so that hoteliers and other parts of the productive economy would continue to be paid in euros while state employees got drachmas – however the pain that caused would be a spur to reducing parasitic government. Secondly the EU might get stroppy about Greece getting rid of all the parasitic rules that the rest of them labour under and either refuse to continue the loans or expel them from the EU – in which case Greek would be able to legitimately repudiate that part of the debt owed to EU states and banks.
The important point is that Greece can unquestionably achieve the sort of growth rates the rest of the world is managing and that if they do so all other problems sink to a manageable size, whereas if their economy continues to contract the other problems become ever more insoluble.
The important point for us is that the same applies except that our problems are currently less. It would be easy for us to reach not merely world average growth rates but much higher.
The primary problem is not the failure of the euro, that is just the symptom, following automatically from government attempts to ignore low growth. The primary problem is the economic failure of EU bureaucratic, corporatist, eocfascist big state model, causing low to zero growth while the rest of the world grows faster than ever in human history.

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