Accept a haircut in turn for a Grexit

Dialogue with the Alter Ego on the Syriza election victory in Greece

Question by Alter Ego of Noah denkt™ (AE): The election victory of Syriza in Greece on January 25 has somewhat rattled the austerity landscape in Euroland. The Tsipras government has soon made it clear that it will no longer accept the previous troika bailout agreement and ask for changes in the current debt repayment schedule. Now, Noah denkt™ has previously already expressed its concern over the fact that EU leaders so far haven’t had the courage to force a Greek exit (“Grexit”) from the Euro currency. How has Noah denkt™’s view on this evolved since then? After all, it cannot be denied that the Greek economy has made some progress since the troika started to monitor local policy there. The annual GDP growth rate, for instance, is now at 1,9% (reference Q3/2014) up from 0.4 in 2013. With this, albeit modest, number Greece ranks among the fastest growing countries in the otherwise lackluster Euro-zone. So something has been done right here?

Answer by Noah denkt™ (Nd): No doubt, some progress has been made in Greece and the reforms that have been implemented have been quite draconian. But the sad truth continues to be that Greece remains far, far away from being competitive enough to afford a Euro currency. Its public administration still is closer to the standards of developing countries than those of France, Finland or the Netherlands. Its reading/Math and Science Pisa score ranks among the lowest in the OECD countries; and in gross R&D spending (0.579% of GDP) it was – even in the hay days of 2005 – closer to that of post-crisis Argentina (0.379 % of GDP ) than to that of neighboring Italy (1.047% of GDP). In view of all this and the burgeoning debt level which Greece carries around with itself (315.5 Billion Euros), it really doesn’t make sense to fool ourselves any longer believing that Greece could one day be a self-supporting member of the Euro currency union. 

AE: This hasn’t always been your position though, has it?

Nd: It is correct that we at one point believed that a concerted national effort in Greece would be able to achieve a miraculous economic recovery of Latvian proportions.  But after all the popular revolt that we have seen in Greece since then (2010) it is really high time to give up that hope.

AE: A Grexit, nevertheless would likewise be terribly harsh on the Greek population. The new drachma would probably lose half or more of its value relative to the Euro which would wreak havoc on inflation, on individual purchasing power, and the country’s economic output. In other words, the Greeks would suffer even more from a Grexit than they have so far under the troika.

Nd: Clearly, the Eurozone would have to somehow help Greece in that rocky patch towards the new post-Grexit normal. For instance, the Greek debt burden could in that case be substantially reduced or cut altogether. Obviously, all these steps would be painful for the entire Euro-zone community. But at least this tragedy would finally come to an end.

AE: This Grexit is not going to happen though, is it?

Nd: You are right, it is probably not going to happen. And that is largely due to the resistance of countries like France and Italy. They believe that they are better off with Greece inside the Eurozone if only to have another ally against German “rigidité”.

AE: So where does this leave us with respect to recovery hopes for the Eurozone?

Nd: Well, these recovery hopes continue to be somewhat dampened due to the opposition against a Grexit. After all, it is only reasonable to expect that the unrealistic management of the Greek dilemma will only incite other dreamers to continue to dream their tax-and-spend fantasies. So, the populist opposition against structural reforms in Euroland will not go away. And growth will therefore not return in the proportions that it should.

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