Home > Economics > Greek Euro exit unlikely

Greek Euro exit unlikely

Greece cannot exit the Euro. Greece does not want to exit the Euro. Greece will not exit the Euro. Just think about what would happen if Greece did.

Greece does not want to leave the Euro

Why would Greece want to leave the Euro? Well, Greece could reintroduced the Drachma and let the currency depreciate, making Greek goods and services more competitive again, hopefully generating economic growth and tax revenue to help pay down Greece’s unsustainable debt.

Sweden tried this three times during the 1980s. It tried to devalue its way out of a cost crisis. That didn’t work and ultimately ended in 500% interest rates, an exit from the ERM in 1992, a real estate crash, banking crash and three years of solid recession thanks to a government and a Swedish Krona with a very tarnished reputation.

Greece problem is similar and that of competitiveness (and inefficient tax collection). You could solve that by lowering your prices. This can be done by letting the currency fall in value, but that is a short term fix, as Sweden discovered. A weak currency imports inflation, as the UK is currently experiencing, which pushes up wage demands and sooner or later the currency needs to fall further to preserve the competitiveness.

The long term solution is to to deal with uncompetitive produce at the source and to actually produce it cheaper and more efficiently and/or with higher quality to improve the value proposition.

Inside the Euro Greece doesn’t have the option to devalue the currency, which is a good thing, as Greece is forced to become more competitive by other means. That is a long term solution rather than an adrenaline kick from a weak currency. If I was Greek that is exactly what I would want for my country.

Greece cannot leave the Euro

So what would happen with Greek debt if Greece reintroduced the Drachma?

Since the purpose of the exercise is to let Greece devalue its way out of trouble, it is fair to assume the Drachma would tumble. As Greek debt is denominated in Euro a tumbling Drachma would instantly take a very big debt problem and make it even bigger. This is a problem Greek export is unlikely to be able to compensate for in the foreseeable future, and Greece would move closer to default.

Hence, a Greek exit from the Euro solves nothing. If anything, it makes a bad situation much worse. Therefore, Greece is very unlikely to leave the Euro. However, debt restructuring is a different matter.

FT.com / Lex – Greece and the eurozone

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  1. June 14, 2012 at 12:15

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