Hans-Werner Sinn has published a special issue of CESifo Forum entitled “The Greek Tragedy.” Here is the abstract:
By the end of March 2015, Greece had already received a total of 325 billion euros in rescue credit from the measures instituted by the EU, the IMF and the ECB, and yet its unemployment has soared to more than double the rate of five years ago, when the fiscal rescue operations started. The reason is that Greece is suffering from a bout of Dutch Disease. The more money that flows in, the lower the incentives to roll back the excessive price increases of the early years of the euro, and the lower the disposition to set off on the stony path to restoring the country’s competitiveness.
Contrary to assertions, the Greek population has also benefited from the rescue credit. Calculated from the onset of the crisis, in net terms one-third of the public credit has contributed to financing the Greek current account deficit, one-third to paying off private foreign debt, and one-third to capital flight by Greek people. Furthermore, the country has profited greatly from the lowering of interest rates on its foreign debt, an advantage that translated into around 50 billion euros between 2008 and 2014. In 2014, overall Greek private and public consumption amounted to almost 114% of net national income.
Greek banks have received some 80 billion euros in ELA credit from the Greek central bank in the past few months. ELA credit, which can be blocked only by a two-thirds majority in the ECB Council, exceeds by far the recoverable assets of the Greek central bank in case commercial banks go bankrupt and the collateral pledged by the banks loses its value. Thanks to ELA, the private capital fleeing to other countries has been replenished with public credit from the international community. This credit has strengthened Greece’s negotiating position with the international community by increasing the other euro countries’ potential losses in the case of Grexit. This could explain why the Greek government has played for time in the current negotiations.
If it should come to a Grexit, it would be crucial to introduce as quickly as possible a new legal tender, in order for all price tags, as well as rent, credit and wage contracts to be redenominated and devalued simultaneously, restoring the competitiveness of the Greek economy. A creeping transition to a new currency by way of state-backed promissory notes (IOUs) that are not legal tender could buttress the solvency of the Greek government, but it would not solve the competitiveness problem. Econometric studies have shown that an economic upturn can make itself felt in as little as one or two years after a devaluation and a haircut on outstanding foreign debt have been carried out.
Figure 5 in the special issue, reproduced below, illustrates (private and public) consumption relative to net national income in Greece, France, Germany and the Netherlands.