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Greece’s Pseudo-Devaluation

A country in a financial condition as dire as Greece’s usually sees its currency fall, which causes a lot of short-term pain while setting the stage for eventual recovery. But the Greeks are caught in a trap: They may suffer devaluation’s effects without the eventual payoff.

The Greek parliament capitulated this week to international demands that it cut 22 percent from the country’s minimum wage, which serves as a benchmark for many workers, and that it immediately trim 15,000 workers from the government payroll. Pensioners will also see their payments reduced. Unemployment has already surged to 22 percent, and industrial production continues to fall as the nation goes into its fourth year of economic contraction.

Greece’s problem is that it owes more than 340 billion euros (about $450 billion), a sum equal to around 160 percent of the country’s annual output, more than it has any hope of repaying.

Most of this is government debt - so why force private sector workers to take a big pay cut? Lower pay means lower income. Lower income means lower taxes; at least it would in a country whose citizens habitually paid taxes, which is not always the case in Greece. Lower taxes mean the government has less money with which to pay its debts. It seems counterintuitive that the country’s European Union partners, along with the European Central Bank and the International Monetary Fund, would demand that the private sector take a huge hit as part of a bailout of the government.

But in Greece’s case, there is logic behind the externally imposed austerity. If Greece still had its own pre-euro currency, the drachma, that currency’s value would almost certainly have crashed by now. This would mean great hardship for Greeks, because the price of everything they obtained from abroad would be much higher compared to their drachma incomes, but it would also make Greek goods and services more competitive. Germans and other eurozone consumers would find Greek vacations and cruise ships a better deal than competitors in Italy and Spain, for example. Manufacturing companies might bring production to Greece to take advantage of cheaper labor. Sales of state-owned companies, especially to foreigners, would net more drachmas, helping to close the government’s budget deficit. Greeks would emigrate in search of work, and their hard-currency remittances would translate into more drachmas at home. So would gifts from the world’s large Greek diaspora, whose members surely want to help suffering relatives back in the old country.

Unfortunately, Greece has no drachma to devalue; it only has the euro. Forcing austerity onto private sector workers is a way to try to simulate the effects of devaluation. Will it work?

It’s doubtful. In a devaluation, everyone who uses the cheapened currency suffers proportionally. As long as Greece tries to service its debts using the euro, Greek workers and pensioners will suffer reduced incomes, but their daily expenses - rent, food, loan payments - will remain fixed. The lower wages may translate into higher profits for enterprises, such as hotels, that cater to foreign customers, without actually making the country more competitive.

Only economic growth is going to put enough Greeks back to work to sustain a viable economy, let alone make a dent in the debt burden that remains after the latest restructuring. If continued use of the euro prevents the country from achieving that growth, Greece will have to abandon the common currency anyway. That will bring a whole new round of painful adjustments sometime down the road.

I have had a tough time feeling much sympathy for the Greeks up to this point. The country lied about its finances to get into the euro zone, used the cheap credit available under the euro to borrow outrageously in order to support a bloated and inefficient society, and then rioted in the streets - most recently this weekend - as each new round of austerity measures was proposed.

But now I think Greece deserves pity. Like their mythological Sisyphus, the Greeks may be fated to endlessly push a financial boulder up a mountain, only to have it roll down and force them to start over. Today’s sacrifice may not bring Greece their hoped-for prosperity; it may not even bring solvency. The Greeks are suffering a fearsome fate, and knowing that they brought it upon themselves does not make it any more pleasant to watch.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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