The alternative of (tax-based) capital controls for Greece

Agora Contributor: Marios Zachariadis
Photo by MacroPolis
Photo by MacroPolis

At first glance, the potentially catastrophic consequences of Grexit on the rest of the Eurozone provide the Greek government with an important bargaining chip. However, the Greek government should take into consideration that Grexit is not the only possible alternative in case an agreement with the rest of the EZ cannot be reached soon.

A more probable outcome is the imposition of capital controls with the discontinuation of ELA. These capital controls would provide ample time for the Greek government to chart its path and for the Greek people to definitely decide their future inside or outside the euro. More likely, capital controls could end up being long-lasting in the case of Greece.

Capital controls would be less costly for Greece than Grexit. Moreover, capital controls would isolate the Greek system and impose a minimal cost to the creditors as compared to the potential negative consequences of Grexit. The latter two points imply that the Greek government might have less leverage in the negotiations than they appear to think. Unless they were willing to put the Grexit option in a referendum and then prepared to denounce debt upon exit. However, since the latter would have greater cost for Greece than capital controls, it would be unlikely for Greece to go through with this in a rational game setting.

If negotiations fail and Greece has to place capital controls, then they might want to opt for a tax-based form as opposed to quantity controls. That is, rather than imposing absolute capital controls on the quantity of capital outflows Greece could place a tax on capital outflows. This would bring in valuable revenue for the Government. It would also have the advantage of a smoother gradual abolition of capital controls as these tax decreased overtime.

This tax would apply to capital outflows unrelated to the trade account, and it could be designed so as to offer incentives (1) to delay outflows and (2) to bring back outflows within a fixed time limit, say a year, once people feel secure enough.

For example, a 50 percent tax could be announced along with a commitment that this rate will only go down in the future. The initial level of taxation would be key. This should be high enough in order to avoid huge capital outflows and to make it credible to commit to only lower it over time, perhaps at a pre-arranged (but somewhat flexible) pace. In addition, any funds that flow out but are returned, say, within a year, could get a reimbursement of, say, 50% of this tax.

A more flexible design could even allow firms whose business relates to short term movement of funds back and forth, not to be affected. The exact level of taxation, time, and flexibility that is desirable should be decided by the Greek government based on the best available information and with technical help from the ECB and the IMF. Additional complications include its monitoring and the potential for the trade account to be used as a loophole in any case.

The above scenario would offer Greece the time it needs to make up its mind while providing the Greek government with an important source of precious revenue in the meantime. This would not be a first best, but both Greece and the rest of the Eurozone would be better off under this scenario as compared to the Grexit scenario.

*Marios Zachariadis is an associate professor of economics at the University of Cyprus and a member of the country's National Economic Council. You can follow Marios on Twitter: @MariosZachariad

3 Comment(s)

  • Posted by: H.Trickler

    >"the potentially catastrophic consequences of Grexit on the rest of the Eurozone."

    What this author sees as catastrophic imho would be a boon for everybody:

    Greek people can live the way they like without any influence from abroad. The other EU countries need no longer pay tremendous sums to Greece.

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  • Posted by: Dean Plassaras

    All such proposals do is to ensure that people should take all their money out now and therefore induce a classic bank run.

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  • Posted by: Edwin Russ

    On the right track but there are lessons to be learned from the Brazilian experience amongst others. No need to reinvent the wheel: Brazil's experience on this subject is well documented and transparent. The Tsipras regime needs to utilise tools from a toolbox such as Brazil's that are (aaa) of proven efficacy and (bbb) innovative in the Greek context. Reverting back to the "stale" and easily shirked (and probably corruption prolonging) wealth-type taxes will cost Syriza dearly in terms of popular support going forward. They are nothing truly new in Greece. Syriza's path forward seems to depend on whether the older guard ministers responsible for the domestic fiscal agenda (as opposed to Varoufakis who is international point man) can escape from the limits of their own imagination on this issue. If they do, Tsipras will be a hero. If not, in time perhaps a zero. I hope the former.

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