January 5, 2015
Grexit is back. We're three weeks away from the Greek general election, which the left-wing Syriza party, which wants an end to Greece's punishing austerity regime, seems likely to win. The problem is that the austerity regime is the condition for continued assistance from the euro zone. If Syriza does indeed win and tries to make good on its promises, Greece could be forced to exit the euro.
I have some thoughts about this, which I present in no particular order:
- Financial crises take longer than you think. I've quoted this before, but Rudiger Dornbusch seems particularly apropos: "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought . . . It took forever and then it took a night." Reaching an accommodation during the last crisis did not mean that the euro was safe, and even if Greece safely negotiates this round, it doesn't mean that Greece won't eventually exit. There is a very serious underlying structural problem in the euro, between rich members who require one sort of monetary policy, and poorer members who would do best with a very different sort of monetary regime. This fissure in the system still hasn't been resolved.
- The deal reached years back is not such a good deal for Greece any more. Back then, leaving made the country unambiguously worse off, because it was running a primary deficit--even if Greece defaulted on all its bonds, it would still be in the red. Which meant that an immediate default would mean even deeper austerity than staying in the euro. Greece is now running a primary surplus (or so they say, anyway). That means default is a more attractive option.