Greece Surrenders to the Underground Economy

The Guardian recently published Greece on the breadline: cashless society takes off, an all-too-brief look at what's happening in the streets of Greece in response to their government's international monetary woes. This paragraph is what triggered my reaction and the title of this post.

The Greek parliament recently passed a law encouraging "alternative forms of entrepreneurship and local development", including exchange networks such as Volos's, giving them official non-profit status for tax purposes.

As I read it, Greece has surrendered to the underground economy by writing off a significant chunk of future tax revenue, and it has to do primarily with "exchange networks such as Volo's." To understand, we have to go back to the top of the Guardian's story.

In recent weeks, Theodoros Mavridis has bought fresh eggs, tsipourou (the local brandy: beware), fruit, olives, olive oil, jam, and soap. He has also had some legal advice, and enjoyed the services of an accountant to help fill in his tax return.

None of it has cost him a euro, because he had previously done a spot of electrical work – repairing a TV, sorting out a dodgy light – for some of the 800-odd members of a fast-growing exchange network in the port town of Volos, midway between Athens and Thessaloniki.

In return for his expert labour, Mavridis received a number of Local Alternative Units (known as tems in Greek) in his online network account. In return for the eggs, olive oil, tax advice and the rest, he transferred tems into other people's accounts.

Greece has officially blessed "off-the-books" economic transactions conducted using an alternative currency. From what I can ascertain, there is no established exchange rate between tems and euros; collecting government revenues based on economic activity conducted in tems is certain to prove problematic, although the terms of service state "Network members have the sole responsibility of the possible obligations to the Internal Revenue arising from transactions between other network members." (Google's translation from Greek) Even if tems and euros are assumed to exchange at parity, the actual exchange rate appears to be considerably different as the following story illustrates.

A story related by one of the founding members of the Exchange and Solidarity Network brings the impact of this law home in full force, particularly when viewed in light of two previous articles I've written concerning the underground economy. (See Author's Note at the bottom of this post.)

"They're quite joyous occasions," she said. "It's very liberating, not using money." At one market, she said, she approached a woman who had come along with three large trays of homemade cakes and was selling them for a unit a cake. "I asked her: 'Do you think that's enough? After all, you had the cost of the ingredients, the electricity to cook ...'

"She replied: 'Wait until the market is over', and at the end she had three different kinds of fruit, two one-litre bottles of olive oil, soaps, beans, a dozen eggs and a whole lot of yoghurt. 'If I had bought all this at the supermarket,' she said, 'it would have cost me a great deal more than what it cost to make these cakes.'"

We have to carefully parse her story to grasp its full import. Her reference to "not using money" is telling, because tems provide a method of account, a medium of exchange, and a store of value. Tems are money, whether the founders of the network or the Greek government realizes it or not. From deeper reading, it appears that the network has avoided the silliness of attaching "labor hour" valuation to the tems, allowing participants to set their own prices for goods and services in tems.

It also appears that the basic rules should help avoid the inflationary problems common to government-controlled fiat currencies. Small loans in tems are available to get started, but there are no apparent provisions for "printing" unbacked tems or fractional-reserve banking, two of the primary causes of inflationary pressure. Neither tem hoarding nor huge debts are permitted within the system. It will be interesting to observe the long-term stability, or lack thereof, of a fiat system with no central bank capable of increasing the supply unilaterally except as short-term loans to new participants.

And look at the effectiveness of the exchange. The woman whose story she relates explains in simple terms that she saw a better return on her investment in tems than she would have using euros. Most telling, the Greek government has lost a good portion of the tax revenue that would have been owed on the sale of "three large trays of homemade cakes, three different kinds of fruit, two one-litre bottles of olive oil, soaps, beans, a dozen eggs and a whole lot of yoghurt," at their euro-equivalent prices, because it appears that tems trade significantly above parity. And although the story doesn't address it, it appears that participants in the exchange avoid much of the regulation official producers face.

Even if there is no official exchange rate between tems and euros, one is bound to arise, because of the remaining need for euros for "official" transactions in the aboveground, regulated and taxed economy. The stability of that exchange rate will also be worthy of observation. The establishment of an exchange rate is certain, because aboveground businesses that are part of the network are allowed to do transactions partly in tems, and partly in euros; most collect half the euro price in euros and half in tems, which implies but does not confirm that euros and tems are now trading at parity. For example, an item priced at 100 euros might be sold for 50 euros and 25 tems, if tems are trading at two euros. The exchange rate will apparently be set by the market, not by official edict.

As people come to understand the advantages of trading in tems (see the story of the lady with the homemade cakes, above) the founders anticipate continued growth.

Choupis said she thought the network would have grown even faster that it has if people were not so "frozen, in a state of fear. It's like they've been hit over the head with a brick; they're dizzy. And they're cautious; they're still thinking: 'I need euros, how am I going to pay my bills?' But as soon as people see how much they can do without money, they're convinced."

From the information contained in the article, Greece's legalization of alternate currencies looks to be capitulation to the underground economy and the voluntary abandonment of what will grow to be a large slice of the Greek aboveground, regulated and taxable economy. I'll be watching closely for related articles. I'm currently making my way through the information at the Exchange and Solidarity Network, as translated from Greek to English by Google. Nothing I've read so far indicates my first impressions are wrong. I'll include an update on what I learn in a later column about alternative currencies and the Phoenix Society. If any readers have additional information or come across related articles, please pass them along. This is an experiment worth watching.

...and that's all I have to say about that.

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Author's Note: My original intention was to save this story and incorporate it into the series of articles I've been writing on the coming Phoenix Society (First two articles here and here) in a post on alternative currencies. On second thought, the story is important enough that it deserves its own post.