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Why Greece Should Reject the Euro

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  • Why Greece Should Reject the Euro

    By MARK WEISBROT
    Published: May 9, 2011


    SOMETIMES there is turmoil in the markets because a government threatens to do what is best for its citizens. This seemed to be the case in Europe last week, when the German magazine Der Spiegel reported that the Greek government was threatening to stop using the euro. The euro suffered its worst two-day plunge since December 2008.

    Greek and European Union officials denied the report, but a threat by Greece to jettison the euro is long overdue, and it should be prepared to carry it out. As much as the move might cost Greece in the short term, it is very unlikely that such costs would be greater than the many years of recession, stagnation and high unemployment that the European authorities are offering.

    The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. Its peso was pegged to the dollar, which is similar to Greece having the euro as its national currency. The Argentines took loans from the International Monetary Fund, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened.

    Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty.

    Within three years Argentina was back to its pre-recession level of output, despite losing more than twice as much of its gross domestic product as Greece has lost in its current recession. By contrast, in Greece, even if things go well, the I.M.F. projects that the economy will take eight years to reach its pre-crisis G.D.P. But this is likely optimistic — the I.M.F. has repeatedly lowered its near-term growth projections for Greece since the crisis began.

    The main reason for Argentina’s rapid recovery was that it was finally freed from adhering to fiscal and monetary policies that stifled growth. The same would be true for Greece if it were to drop the euro. Greece would also get a boost from the devaluation’s effect on the trade balance (as Argentina did for the first six months of recovery), since its exports would be more competitive, and imports would be more expensive.

    Press reports have also warned of a sharp increase in Greek debt from devaluation if it were to leave the euro zone. But the fact is that Greece would not pay this debt, as Argentina did not pay two-thirds of its foreign debt after its devaluation and default.

    Portugal just concluded an agreement with the I.M.F. that projects two more years of recession. No government should accept this kind of punishment. A responsible leader would point out to the European authorities that they have the money to support Greece with countercyclical policies (like fiscal stimulus), though they are choosing not to.

    From a creditors’ point of view, which the European Union authorities have apparently adopted, a country that has accumulated too much debt must be punished, so as not to encourage “bad behavior.” But punishing an entire country for the past mistakes of some of its leaders, while morally satisfying to some, is hardly the basis for sound policy.

    There is also the idea that Greece — as well as Ireland, Spain and Portugal — can recover by means of an “internal devaluation.” This means increasing unemployment so much that wages fall enough to make the country more internationally competitive. The social costs of such a move, however, are extremely high and it rarely if ever works. Unemployment has doubled in Greece (to 14.7 percent), more than doubled in Spain (to 20.7 percent) and more than tripled in Ireland (to 14.7 percent). But recovery is still elusive.

    You can be sure that the European authorities would offer Greece a better deal under a credible threat of leaving the euro zone. In fact, there are indications that they may have already moved in response to last week’s threat.

    But the bottom line is that Greece cannot afford to settle for any deal that does not allow it to grow and make its way out of the recession. Loans that require what economists call “pro-cyclical” policies — cutting spending and raising taxes in the face of recession — should be off the table. The attempt to shrink Greece’s way out has failed. If that’s all that the European authorities have to offer, then it is time for Greece, and perhaps others, to say goodbye to the euro.

    Mark Weisbrot is the co-director of the Center for Economic and Policy Research.

    http://www.nytimes.com/2011/05/10/op...er=rss&emc=rss

  • #2
    Yeah, the same debate is going on here too, and all the experts and 'experts' are basically split between the POV in the article and the one that wants to keep them in the Eurozone. IIRC Barnabas wrote about the Argentinian example as well a while ago....
    Blah

    Comment


    • #3
      Unity.
      Life is not measured by the number of breaths you take, but by the moments that take your breath away.
      "Hating America is something best left to Mobius. He is an expert Yank hater.
      He also hates Texans and Australians, he does diversify." ~ Braindead

      Comment


      • #4
        Greece sucks
        If there is no sound in space, how come you can hear the lasers?
        ){ :|:& };:

        Comment


        • #5
          The big difference between Argentina and Greece is that Argentina is one of the biggest agricultural exporters in the world, and a rather self sufficient country.


          When we devaluated, we put a new 20% tax on our agricultural exports, and the farmers didn't care because for their exports they would get dollars, but everything in Argentina had become like 80% cheaper in Pesos, so even with the new tax, the devaluation had made them, and all exporters, suddenly very wealthy. It took many years of inflation to stabilize the prices, now Argentina is about as expensive as it was before the devaluation.

          I don't think Greece can put a tax on a group of exports as Argentina did with its farmers. And that was very important in the Argentine success the years after the devaluation.

          The idea behind Greece leaving the Euro is that it would made Greece so dirt cheap that Germans like Bebro would overwhelmingly prefer to go on vacations there and not Spain.

          On the self sufficient thing, devaluation obviously makes imports more expensive, in Argentina apart from hardware, we produce pretty much everything we need, some of the stuff may not be as high quality as the imported stuff, so the years after the devaluation we were still able of consuming at least the cheap local versions of the stuff we could not longer import. For example, I think both Pringles and Haagen Daazs disappeared from Argentina for 4 or 5 years after 2002. And ten years ago we still did not have to import oil.

          I don't think Greece can survive that "well" if imports get much more expensive.


          I do think they should never have joined the Euro in first place.
          I need a foot massage

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          • #6
            If I understand correctly, Spain's a much larger and more important economy to the eurozone, and therefore couldn't really leave, is that right?
            If there is no sound in space, how come you can hear the lasers?
            ){ :|:& };:

            Comment


            • #7
              Yes, the economy of Spain is like 6 Portugals.
              I need a foot massage

              Comment


              • #8
                Yeah, Greece and Portugal are not particularly large economies. Especially when compared alongside the major European economies...
                Speaking of Erith:

                "It's not twinned with anywhere, but it does have a suicide pact with Dagenham" - Linda Smith

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                • #9
                  How do you separate the men from the boys in the Greek navy?

                  Comment


                  • #10
                    crowbar

                    Comment


                    • #11
                      There is no easy way out for countries with massive budget deficits. The Europeans are forcing Greece to reduce its deficit over a few years to about 3% of GDP. Any alternative would involve a default which means Greece would have to reduce its deficit to 0% of GDP as it would be unable in short term to obtain credit, a far harsher remedy. Ejection from the Euro would help its competitiveness and therefore a quicke recovery in the medium term probably will eventuate, but in the short term the medicine would be much much harsher.

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                      • #12
                        It seems to me that the article is basically saying "The way to overcome your massive debts is ignore them and never pay them back."
                        One day Canada will rule the world, and then we'll all be sorry.

                        Comment


                        • #13
                          yep, but it does not work that way, because suddenly the gov't cannot borrow money. I suppose if it dropped out of Euro rather than borrow it could print money, the hyperinflation would cure the debt problem, just create many other problems more severe.

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                          • #14
                            Something nothing has mentioned yet is, if Greece leaves the Euro, what happens to all the Greeks who have savings in Greek banks, in Euros?
                            And what happens to the greeks who are indebted in Euros?

                            What we did in Argentina was, turning all the debts in Dollars into debts in Pesos, that meant, beneffiting indebted people. And the ones who got screwed were the people who had savings. You have to choose whom to screw.


                            We managed to perform very well for years with no credits because of our exports, we had both budget and trade surpluses so we didnt need credit at all.


                            I think the best solution for Greece would be becoming a German protectorate, something like a German Puerto Rico. And I am not trolling.
                            I need a foot massage

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                            • #15
                              Germany already tried that once.

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