Following decisions made by the eurozone countries in mid-July on Greece’s third bailout, the country’s membership in the euroclub seems secured. At least for the time being.
During a hectic weekend of negotiations, Greece’s ejection from the common currency was nonetheless considered. It is known that at least Finland and Germany – especially the latter’s austere finance minister Wolfgang Schäuble – entertained these views. Remarkably enough, Grexit was the Finnish government’s first option when the negotiations began.
While this did not come to pass, the debate on Greece’s future in the eurozone is far from over. It also appears that other plans to develop, that is to say, deepen the eurozone towards a tighter economic and political union, have no chances to proceed until Greece restores the basic health of its economy and stops being the euroarea’s black hole of joint liabilities.
Leaving the wider repercussions aside, what would Greece itself benefit from its exit from the common currency?
There seems to be a broad understanding that Greece would be better off outside the euro. Many economists see that a return to drakhma would enable Greece to devalue massively. Maybe as much as 50 or 75 per cent, which is what Iceland and Argentina did in their crises previously. This would help Greece’s exports to be competetive in world markets. A return to own currency would also in all likelihood lead to a large scale resettlement of Greece’s state debts.
After initial pain, this would lead Greece back to sustainable economic and social development. But would it, really?
It is true, that the bailouts are no cure for the real ills of Greece. But neither is Grexit, for the following reasons.
Besides its tourism industry, Greece has no large export sectors that would benefit from a devaluation of that scale. Its shipping industry appears to be competetive already, and the same goes with tourism. With devaluation it would just sell these goods to its customers on bargain prices, and receive less in return.
On the other hand, the rest of Greece’s economy depends heavily on imported goods, energy and fuels. With devaluation, these would become dearer. This would have a negative impact on any economic activity relying on imported goods, not to speak of Greek customers buying imported goods with dramatically higher prices. The already weak purchasing power of ordinary Greeks would be weaker, and there would be less to spend on domestic goods as well.
As is the case with devaluations, inflation would hike up in Greece. Certainly, deflation would vanish, but with a high price. In fact, one of the main motivations to join the euro to begin with in Greece was to fight the country’s perennial economic problem, inflation. The simultaneous impact of leaving the euro and devaluation would make it certain, that inflation would return and soon undo the competivity gains brought by the devaluation. To fight the inflation the central bank would have to resort to higher interest rates. And these would hurt Greek customers and investors alike.
At the same time Greece’s competitors would enjoy lower inflation and interest rates secured by the eurozone.
So, after initial pain, there would be more pain to come. This time, without the euro. Yes, without the euro, finally! But would that be an achievement of any lasting value?
With the euro comes the European Central Bank, that runs the currency. What would Greece have? The Greek Central Bank, running the drakhma. Fighting Greek inflation with Greek interest rates.
What would be the credibility of the Greek Central Bank, and the stability of the drakhma? How would the Greek government and politicians play the situation?
Some observers were astonished that Greece’s Syriza-led government eventually caved in and accepted the harsh terms of its third bailout.
Given the alternative, this may not be that astonishing, after all.
The madness that is killing Greece is the madness of the growth stifling economic policies imposed on it, and the deficiencies of a half-baked economic and monetary union.
The talk of Grexit is talk, that seeks to hide these realities.