Beware of bankers bearing gifts: Greece and the false dawn of seigniorage

Economy September 21, 2015 01:00


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THROUGH years years of misery, the cradle of civilisation has not lately seen a sunrise. The Greek economy seemingly continues to sink into the vicious spiral paved by Germany, its wealthy European Union (EU) brother.

Until now, economic gurus have provided in-depth analysis of how Greece fell: Over-accumulation of sovereign debt exceeding the critical debt ceiling due to populist over-spending, massive tax evasion and monetary inflexibility.

Above all, what bothers me the most is how rare it is to witness such a crisis where the debt limit is reached and the country suddenly loses its credibility. To think about it analogously, any one of us would get sued and go bankrupt if our creditors thought we could not repay the money. However, what would happen if we could print out our own banknotes and coins? Of course, then it would be unlikely for us to go bankrupt. Most countries have this ability and perhaps that is why the Greek debt crisis is so strange.

Economists call this “seigniorage”, which means the profit earned by governments from issuing money.

When new money is printed, the value of the money declines as inflation rises. In other words, printing more money is equivalent to raising taxes. The difference is that this is not from visible tax such as income tax, but a subtle inflationary tax levied from everyone in the economy. The higher the inflation, the more seigniorage the government obtains.

Yes, the government can normally use seigniorage to pay its debt. However, everything comes at a price. Raising inflation itself is costly. Too high inflation means distress for households, especially those with fixed income. Inflation also raises the lending rate, so that the interest payment for all newly-issued debts will increase. In some senses, it is just like rolling over debt for the future.

Why then did Greece not use seigniorage before its judgement day? The answer is simple: It could not.

In 2001, Greece threw away its own currency, the drachma, and adopted the euro currency. In doing so, Greece lost the authority over its currency. Such authority now belongs to European Central Bank (ECB), which is held proportionally by the national central banks of EU member states as shareholders. Having about a 2-per-cent share of capital, Greece has little voice in the ECB compared with its EU big brothers, like Germany. Ironically, Germany is Greece’s biggest creditor.

While Greece had its hands tied, did the ECB use seigniorage to help Greece instead? The answer is yes and no. Yes, ECB did launch the Quantitative Easing programme (QE), which is like what the United States has done in the past. But it did not totally go to Greece; rather it came in the form of new debt that Greece needed to pay. The QE also came with many requirements, which were mostly unfriendly to countries in need. What was the point then?

Looking at the EU data, despite QE programme, the EU inflation rate is actually decreasing. This is mainly due to the decrease in the world’s oil price. Low inflation leads to low inflationary tax, making the effects of seigniorage minimal. As a result, the EU debt-to-GDP ratio is still soaring. It seems like every door is closed for the Eurozone.

For me, the fault lies squarely at the feet of the single currency concept. The economic recovery mechanism of the entire euro zone is distorted to the extent that other small economies will eventually have a similar fate as Greece. Until the breakdown of the euro zone, the sun will never rise on the European Community, except in Germany.

Athakrit Thepmongkol is from the School of Development Economics at National Institute of Development Administration (NIDA)

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