Greece makes an offer ECB can’t refuse

Greece is at the verge of default and just proposed two things to Germany, which were not accepted by the government of Germany. Finance Minister of Greece, Yanis Varoufakis, suggested swapping the debt of the Greece government held by ECB and the official sectors for growth-linked and perpetual bonds. The former proposal would allow for change of the interest rate on the debts, depending on the growth rate of Greece. In other words, the interest rate on the debts would go down if Greece happens to grow slowly. The latter proposal truly helps Greece to breathe because it sets no deadline for Greece to pay for the debts, which implies that Greece may repay the debt anytime whenever it is able to do so. These proposals, of course, were rejected as there is a likely that Greece might not even pay the debt at all if the proposal were accepted.

Yet I believe these offers are considerable at some degree. First, due to the instability of Greece, the value of Euro is being depreciated, and this influences the world economy, encouraging foreign investors to hold back. If continued, the EU nations would find it difficult to manage exports and imports, and their economic growth would be slow enough to be considered to be recession. Secondly, if Greece decides to withdraw from EU and to establish its own central back to adjust an exchange rate, there could be other EU nations that are willing to leave EU. When Euro was addressed, relatively less economical nations among EU were expected to face economic loss as the value of Euro would be appreciated for them. This problem could be solved if they are able to print out their own currency, but EURO is only printed by ECB. EU might loss its unity once some nations decide to leave followed by Greece’s withdraw.

Milton Friedman once emphasized the danger of the united currency, Euro, as it lacks a flexible exchange rate that could enable each nation to have the appropriate monetary policy. For Euro nations, the alternative adjustment mechanisms are changes in internal prices and wages, movement of people and of capital, which are severely limited by differences in culture and by extensive government regulations, differing from country to country. Different governments will be subject to very different political pressures and these are bound to create political conflict, from which the ECB cannot escape.


Perhaps ECB might have to consider the bold, absurd proposals made by Greece and compare the cost and benefits of saving Greece or kicking it out of EU. I consider Greece’s behavior as an economical terrorism, and Greece’s proposals remind me of the famous quote ‘I will make an offer he can’t refuse’ in the movie, ‘Godfather’. In such regards, Greece does resemble Mafia.

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