Wednesday, May 30, 2012

Greek exit from the Eurozone: Neither inevitable nor desirable

by Avinash Persaud


May 30, 2012

Should Greece leave the Eurozone? This column argues that aggressive restructuring of Greek debt within the Eurozone, rather than departure, is the best option.

Glance at the headlines and you would think that Greek withdrawal from the Euro is a mere formality. Plans are being drawn up, we are told, by responsible policymakers and businessmen. Hedge funds have laid on their bets. Speculation has moved on to whether Greece’s exit will mark the end of the euro. This takes self-fulfilling prophecies to a new level. Greek departure from the Eurozone is a possibility, but is far from inevitable. Departure from the euro worsens the economic problems facing Greece and Europe and so if those who will make the decision are immune from bubbling nationalism, they will opt against it (see Xafa 2012). Aggressive restructuring of Greek debt within the Eurozone, not departure, is the best path. A path made more possible now that Greek austerity is delivering a budget surplus before interest payments.

Outside of Greece, most believe the root of the problem is that Greeks are overpaid, undertaxed and over-indulged by state benefits. Foreigners are always too much of this or too little of that, but even if these opinions were right, such issues of labour productivity, fiscal legitimacy, and financial responsibility, could never be solved by the re-adoption and devaluation of a local currency. Devaluations serve to keep the current show on the road by temporarily devaluing local wages and savings against those overseas. Just before joining the euro, Greece devalued the drachma versus the deutschmark by 14%, the last in a long string of devaluations, but that competitive boost, like those before it, did not last. Arguably the way to deal with such fundamental issues is to tie the macroeconomy to an anchor of value and focus on sorting out labour and tax reforms which, it is often argued, German Chancellor Schröder successfully managed a decade ago, helping to explain Germany’s competitiveness today.

Uncontroversially, re-adoption and devaluation of the drachma would cause the value of Greece’s debt as a percentage of GDP, already at 160%, to soar, probably doubling or trebling, as this €356 billion of debt promises to be repaid in euros. Any devaluation would have to be followed by a default. It is a hopeless and useless strategy proposed by those enjoying Schadenfreude at the Eurozone’s difficulties. Greece looks insolvent. Pelting liquidity at it will not help. Greece should therefore restructure its debt. Lifting the pressure on reforming productivity, taxation and state benefits by devaluing would be neither sufficient nor necessary.


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