How bad would it be for Greece to leave the euro?
There’s been lots of discussion lately on whether Greece should exit the euro. Sure, advocates say, in the short term the country might face even more austerity and a crushing recession. But in the long run, Greece would be free to grow. Here’s Arvind Subramanian making that case:
Just look at what happened to the countries that defaulted and devalued during the financial crises of the 1990s. They all initially suffered severe contractions. But the recessions lasted only one or two years. Then came the rebound. South Korea posted nine years of growth averaging nearly 6 percent. Indonesia, which experienced a wave of defaults that toppled nearly every bank in the entire system, registered growth above 5 percent for a similar period; Argentina close to 8 percent; and Russia above 7 percent. The historical record shows clearly that there is life after financial crises.
This would also be true in Greece, even allowing for the particularities of its situation. Greece’s low export-to-GDP ratio is often said to preclude the possibility of high export-led growth. But that argument is not ironclad because crises can lead to dramatic reorientations of the economy. India, for example, managed to double its similarly low export-to-GDP ratio within a decade after its crisis in 1991, and doubled it again in the following decade even without a big currency depreciation.
Now let’s go to the counterarguments. Greek economist Yanis Varoufakis says this sort of talk is “profoundly wrong” and that there’s no way Greece can emulate Argentina. For one, the trade situations were completely different (Argentina got to sell a bunch of commodities to a fast-growing Chinese market.)
Second, Varoufakis argues that Greece wouldn’t simply be devaluing its currency the way Argentina did — it would be swapping out an old currency for a brand-new one. And that transition could get very, very messy. “Bank of Greece colleagues tell me that it will take months before ATMs are stocked with new drachmas once they get the go-ahead to print them,” he writes. In the interim, Greece would be “unmonetised” — people would be paying each other with IOUs, presumably — a good recipe for civil unrest and other nasty surprises.**
Varoufakis also worries that a Greece exit could drag down the rest of Europe. What if, say, countries like Portugal and Italy start seeing their own bank runs and head for the exits? A continent-wide euro collapse could make it nearly impossible for a newly unshackled Greece to keep growing through trade:
When Argentina defaulted and broke the peg, the ill effects on its trading partners (China, Brazil, etc.), as well as on the broader macro-economy in which it was functioning, were negligible. If Greece leaves the euro, however, the results will most certainly prove catastrophic for our ‘economic ecology,’ and in a never-ending circle of negative feedback, will bite our struggling nation back.
For what it’s worth, most Greeks tend to side with Varoufakis — polls show that some 80 percent of the country wants to stay within the euro. Still, as we discussed yesterday, if Greek bank customers keep withdrawing their money from Greek banks and sending their euros off to Germany, that could drain the country of its currency and force a Greek exit anyway — even if no one actually wants to leave.
** How long would it take for Greece to print and distribute a new currency, anyway? Here’s one historical precedent: “In 2003, the U.S.-led coalition managed to do it in Iraq in less than three months. But that required the efforts of De La Rue, a British speciality printer, a squadron of 27 Boeing 747s and 500 armed Fijian guards to ease the process.”