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NY Times Op-Ed May 9, 2011
Why Greece Should Reject the Euro
By MARK WEISBROT
Washington
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.
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