Economist Charles Calomiris offer Tsipras Orthodox and Radical Solutions

NEW YORK – From the Ancient Greeks to modern-day Americans, those two cultures have been beacons of freedom and achievement. So, it should not come as a surprise that Greek-American economist Charles Calomiris, Henry Kaufman Professor of Financial Institutions at the Columbia University Graduate School of Business, believes that increasing economic freedom is the key to getting Greece out of crisis.

During an interview with The National Herald, Calomiris said he would be happy to present Prime Minister Alexis Tsipras with a blueprint for a new Greece.

The young prime minister would first have to accept a familiar diagnosis and prescription: the cause of the crisis is Greece’s falling out of competitiveness in the world economy, and the solution is structural reforms.

Calomiris said that the austerity measures, which merely exacerbated the downturn, and the debt overhang, have been overemphasized in media headlines. “Fixing those will not fix unemployment,” he said.

Calomiris is talking about orthodox economic theory, but Tsipras and his comrades presented a different approach to the Troika during the recent negotiations. And it is not just Greece vs. Germany. Even Greece’s Southern European neighbors who are in the same boat were unsympathetic.

Tsipras now has an opportunity, however, to level with the voters and make a fresh start, but SYRIZA’s hard-left composition does not make Calomiris optimistic that Tsipras could take a new approach.


“It could be that Tsipras just can’t think straight,” a point Calomiris made in response to numerous issues.

He emphasized, “I do not mean irrational, just uneducated,” but he later said “people from Athens who know him whose kids go to school with his kids tell me he is a train wreck, and I trust those opinions.”

The Greeks aren’t the only stubborn ones, though. Calomiris has long wondered why the EU has not moved to a separate currency for Southern Europe that will enable them to become more competitive – through the necessary reforms – with an option to rejoin.

But Calomiris focuses on what Greece can do by itself. Some measures are sneaky.

“One view says [Tsipras] actually wants to have a bank run in Greece that will force him to exit the euro, and then say he never wanted to do it. He would avoid the blame but get the recovery he can get from devaluation.”

Nevertheless, Calomiris said “it is worth the time for me to write an article laying out what Greece should do.”

One point is practical. “You can do a world of good for yourself by being an example of something Germany wants to be a precedent, and that Spain would welcome…For Tsipras to get progress on the debt and austerity issues, he has to make a credible commitment to real reform, then he can say ‘now, to help me actually get there, I need some short-term help.’”

That could include funding for infrastructure funding and debt restructuring.

“But I’m with Germany,” Calomiris said, “the cart does not go before the horse…Greece needs to make a real commitment to reform, not this dance with the troika under Samaras, which was a joke.”

He reiterated that “What has caused the unemployment is the lack of Greek competiveness,” and an overvalued – for Greece – currency.

Told that it had seemed that a Harvard MBA like Antonis Samaras was precisely the kind of Prime Minister who could convey that to the people, Calomiris replied “he never said it. He wasn’t serious,” based on his conversations with Samaras’ colleagues.

“I don’t look at what the Greek government has wasted its time doing for the past five years as significant reform. There are some areas I would call reforms – labor laws and some of the relaxations on business licensing, but what reform is about is getting rid of things which are barriers to productive activity.”

Like “labor laws that allow people to be unproductive on the job and that make you not want to hire anyone…an extravagant pension and welfare system…and restrictions on competition that are obviously designed to help entrench certain people,” he said.

A main feature of economic reforms is that it makes people compete more, but “How do you get that to happen in an environment where there is corruption and business and labor lobbying for protection,” he asks.


Calomiris has an intriguing but radical plan to attack the hydra of bureaucracy, oligarchy and corruption through decentralization and competition among regions in Greece.

He said Tsipras should tell Merkel, “I am going to create 30 zones in Greece – he picked an arbitrary number for the sake of discussion – “that are going to become much more autonomous. Each will be administered locally and they will be competing with each other to see which can have the most effective tax collection system, which can have the most productive labor and competitive firms.”

“There need to be credible institutional reforms,” Calomiris explained, “because the local officials are just as corrupt at the central government,” but he noted it worked in Hong Kong in the 1970s.

“The crucial thing was that there was a separately administered and separately funded anti-corruption commission. It had the legal ability to prosecute corruption. That occurred because the British government was still in Hong Kong and wanted reform…but Greece is in the same position. The EU can play the role of the British government.

“You can get the low-corruption countries like Denmark to agree to administer and be part of the commissions in each of these locations…They can establish tax authorities operating locally on the principle what you are spending is what you tax,” he said.

An anti-corruption commission can fix the Greek judicial system, but prosecution authority must be overseen by the European Commission.

“Is this possible? Yes, if the EC is willing to support it with budgetary allocation for the anti-corruption effort. I have no doubt it can be done.”

Tsipras could then say to the EU “what you have to do now that I’ve made that commitment is help me make sense of this short and long term.”

Calomiris said the EU would have fund not just anti-corruption efforts, but special projects in Greece that will get people employed. Debt relief will also be needed within a framework that will allow everyone to declare victory.

“The problem is,” he said, “it is a very orthodox economy program, based on the classical liberal idea of decentralization of government, freedom of individuals coming from greater competition,” that the far-left does not welcome, but there are promising signs of out of the box thinking in SYRIZA.

“I think one of the best proposals Varoufakis has come up with is GDP indexed bonds. And because it is a swap it can be done in a way that is not a default.”


Ironically, SYRIZA is committed to undoing one of the few reforms implemented under Samaras, labor market liberalization.

As for SYRIZA’s concern about leaving good workers unprotected he said, “that’s what laws are for, to make sure that people are treated justly.”

“If you told people that you can hire people under flexible Scandinavian labor laws, Greece will be able to compete for foreign direct investment,” he said, and with creative thinking, obsolete labor laws can be phased out to cushion the social and political blow.

The obstacles are big, but the upside for Greece is high. “If we had a competitive environment where capital could come into Greece and not feel someone is trying to trap it or trick it or take it, you would find people will want to go there.”

Agriculture is one of the areas that are so unproductive, with practices 40-50 years behind the times. Calomiris said “You can bring in know-how embodied in new equipment and firms that know how to operate,” enabling Greece to make a great leap.

But the bottom line is that “Labor and capital needs competition to be able to perform well – that’s human nature…but I have zero hope that this man who named his son after Che Guevara is going to see this is the way to run the country. But if he wants to be a great success, this would work…leap frogging the stingy and gradual reform process,” of his predecessors.


Calomiris does not think Greece should deliberately leave the Eurozone and revert to the drachma. “I have always argued that the best path for Greece is a reform path. If it pursed credible reform it would be able to receive assistance from the EU, IMF, and others to smooth that path.”

In a 2011 presentation, he argued, however, that “if they aren’t going to do that, they might as well leave the euro,” and predicted that “If they just pretend to do the reforms they will end up getting Tsipras elected – around now – and that would lead to the worst kind of populist, socialist nightmare, making things even worse, and that would lead to leaving the euro.

“The current option is the worst – leaving the euro with Tsipras in charge…with Fidel Castro at the helm.”

But a Grexit “is not going to happen because someone decided to do it but because deposits move out of Greek banks so fast that depositors can’t be paid off, and Greek banks suspend convertibility of demand deposits into currency,” he said.

“You are then driven very quickly to make a decision about long term adjustment because you can’t run a banking system -– you can’t withdraw cash, credit cards and checks are not usable. The whole society is crippled.”


One option is an internal devaluation. Contractual commitments can still be resolved in euros, but at, say, 20 percent less. Wages, deposits would be worth 20 percent less, but so would loans, which means healthier banks. “But no one has ever done this before. It is a theoretical idea…and it will be legally contested, but it can be done.”

Calomiris believes “Greece can also default on the debt and remain in the Eurozone…the ECB will have to decide what they will do, but If banks are stronger and still in the euro, that might be enough.”

Another option after convertibility is suspended is to return to the drachma. That will make Greece more competitive, and by printing money and spending it on infrastructure, unemployment will come down, making Tsipras very popular, but it will not fix the problem of long-term productivity growth.

But the temptation to print too much money will prove too great, leading to high inflation.

“There will be a sharp contraction of imports with some import substitution, but euro value of Greek wages will plummet and there will be huge decline in their living standards.”

That’s why he prefers the 20 percent solution.

To avoid all of the above, “the big question is how to get depositors in Greece to be comfortable, Calomiris said. “That means going through with the reforms.”

The likely outcome, however, “is they will leave the Eurozone,” for which he says Germany and the EU are now prepared. “Notice how little the bond markets reacted to the new risks of a Greek exit,” he pointed out.

But one can still hope for a concerted reform effort.

“The good news,” Calomiris said, is Greece has so much potential to improve that it could be the most successful story, and Greece has a diaspora that would love to invest.”

But he ended on a negative note: “I wouldn’t invest in Greece right now. Why would I want to go and fight with bureaucrats?”



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