Why Greece Could Be Better Off Outside the EZ

Last week I wrote about the difficulty of doing business in Greece, and the role that the government plays in perpetuating the bureaucracy. Does all of this mean that Greece is doomed? Not necessarily. Returning to the drachma would be ignominious for Greece, but it need not decimate the country and may be the only realistic way of spurring the kinds of structural reforms that are essential if Greece is to make a sustainable recovery.

Greece faces a stark choice about how to return to growth. It can continue along its current path of endless austerity aimed at engineering an internal devaluation. This option would probably involve a decade of depression and is therefore likely to be politically untenable.

The alternative to internal devaluation is for Greece to default and abandon the common currency. A new drachma would depreciate massively, boosting Greece’s competitiveness almost overnight.

Greece has a vibrant tourism industry contributing around 18% of GDP that has suffered from cheaper holiday options in Turkey and northern Africa. Agriculture, manufacturing and pharmaceuticals are also sizeable Greek export industries. All of these sectors—and therefore GDP growth generally—would benefit significantly if Greece’s products and services saw their relative prices plummet.

In addition, there’s no reason to believe Greece would be left without a financial lifeline if it exited the euro area. Its departure would be handled like a divorce, in which Greece and the troika acknowledge that their relationship no longer works. The troika would provide some bridge financing to ease the turmoil that an exit would inevitably entail for Greece.

This financing would continue to be conditional on the same structural reforms that the troika is currently demanding. After a default and euro area exit, however, the Greek government would have much greater incentives to deliver.

Currently, the cost of failure to reform is not particularly high: criticism from the troika and demands for more austerity. After a default and euro exit, failure to reform would probably mean a loss of bridge financing with dire consequences. Greece could succumb to profound civil unrest of the kind seen during the military dictatorship. The country is not self-sufficient in food—if hyperinflation were allowed to set in, food shortages and malnutrition could ensue.

The threat of such a prospect may finally provide the impetus for a Greek government to get down to doing the hard work of structural reform. But there are no guarantees. Greece’s entire political class has always been obstructive and there is no obvious sign of new blood coming through the established political ranks.

And yet on my recent visit to Athens, bright, young Greeks spoke to me about their hopes of forming new political movements, untainted by the parties that have gone before. When I asked why this has yet to happen, they responded that Greece must sink further before it will be ready to revive itself.

“We are all on the sidelines,” one young man said to me, “waiting for Greece to hit bottom. We do not want to mobilise and get involved now, because the house of cards could come crashing down on top of us. We will wait until the collapse has happened and then we can finally start rebuilding anew.”

A Greek default and exit could signal the turning point that a desperately needed new political class is waiting for.


For RGE’s views on EZ endgame scenarios, see EZ Endgames: Timing is Everything

(As always, I greatly appreciate your comments. I’m on holiday this week and it will take me a few days to approve and post your comments, so please be patient!)

This post originally appeared at Economist Meg and is posted with permission.

12 Responses to "Why Greece Could Be Better Off Outside the EZ"

  1. donna   March 6, 2012 at 8:00 pm

    hello your comment about the GR i see is like some one speaking what have listening ..and not with basic….a truth is i don't have nothing with GR ..so am not even citizen GR ..out from EUZ Inside for me is the same ..problem is here in GR dosen't have transperence….problem is politice follow…and this country is 200 defficit AND 100 behinde of the devolopment world..i am worry because the future of the young people is really darkness…i am curiose you did not get very excpensive divorce with R EG??
    AND IS TRUTH IF I CAN I GO TO HELP REG but i can not ..because is nothing truth what Y know….thank you

  2. Greek Economist   March 7, 2012 at 2:05 am

    Dear Megan,

    I read your articles from time to time both as Greek and an economist.
    1. There is a common misconception between economists that reduction in salaries and internal devaluation boosts a country's competitiveness. Although this is generally true, it is not true for the tourism industry in Greece. Most of the hotels and resorts work at almost full completeness during the summer and a decrease in prices will not benefit the country at least in the short term (in the long term we can argue that excess demand will lead to further investments in this industry), not to mention that lower prices attract lower income tourists something that from my point of view should not be the case for Greece as it has a lot of advantages that could attract medium-high income tourists if the whole product was branded and organized properly.
    2. You say that the alternative to internal devaluation would be a “default and abandonment of the common currency”. Greece currently faces 2 problems. One is the immediate threat of public debt and default and the second one is the structure of its economy which is mostly consumerism-centric. Innovation does is non-existant, business awareness is limited and the whole economy is very dependent on non-transparent public spending. While defaulting and exiting the eurozone could solve the first issue and alleviate the second (actually buy time to fix it in case that the existing political class can fix it), this option does not take into account the geopolitical costs/benefits both for Greece and the rest of the European countries. The geopolitical risks actually raise the costs of a Greek exit from the EZ to an overwhelming level. But my question is that if the Greek political system is willing to implement the structural reforms why then defaulting and staying in the EZ is not an option?
    3. As a possible scenario you mention that the “Greek Government would have much greater incentives to deliver the necessary structural reforms” in case that Greece exits the EZ. I believe this is not going to happen mainly because I know the culture of Greek people and Greek politicians. Let me put it correctly though. I am sure that the majority of the society a couple of months ago would be against a possible exit from the EZ. However, if for any reason such an event happens they would probably see this as the solution to their problems (although it is not a solution to the underlying issues…) rather than an opportunity to change the status-quo. And this is because they have suffered a lot for 3 years, but limited progress has been done in terms of structural reforms. However, this scenario could be the case in the medium-term mainly due to the fact that increased proverty will “activate” them and make them find ways to change/challenge the current status-quo.
    4. I will conclude with an optimistic note though. Greece has a lot of advantages that if they were used properly we could be speaking about a Greek Miracle in the next couple of years. Greece has a much bigger percentage of people with a university degree compared to other european countries, which means that it could attract foreign investments if the regulatory framework is fixed and if beaureacracy dissapears (especially now that the wages are so low). Due to its good climate and sunny weather, investments in solar energy could transform the country in a major energy player. The new generation is much more educated than the previous one, a lot of them have lived abroad at some point so they have experiences that the previous generation does not have and this could make the greek businesses more global and more dynamic. Greece, although in the middle of a crisis, is pushing through investments in broadband networks, and therefore modernizes its old style traditional economic model. What this country really needs is fresh people in its politics and a radical change in the way politics in Greece work. Of course this is something that its people have to (and eventually will) change.

  3. Aegean1972   March 7, 2012 at 7:29 am

    Dear Megan,

    Greece (on its own) doesnt have the knowhow to take itself out of the loophole. they need foreign assistance. Knowhow and financial assistance.

    If they divorced from the euro, they would probably collapse in less than a year. their political leaders are simple incapable. Civil unrest would be huge and the political consequences for europe would be really really bad.

    We have enough unrest in the middle east and africa. Not to mention Iran.
    Imagine what would happen if Greece gets the same. and imagine how much the spreads of the rest of the euro-periphery would go to. Total chaos.

    Greece needs a strict nanny that will slowly transform them into an organized nation (within the euro) and make them a florida of Europe. a retirement/holiday destination. Because personally i would rather be vacationing on an greek island than in an (cheaper but unsafe) other destination.

    Corporations should also focus on exploring the natural gas resources that the country could possibly have in the Aegean.

    Greece doesnt need a divorce from the euro. Greece needs a strict nanny and to give vision to its people. To change the "bureucratic" mentality that has poisoned their minds for decades.

  4. DiranM   March 7, 2012 at 1:46 pm

    Megan, your article makes good sense. Nouriel Roubini has outlined the severe structural lmitations of the Eurozone. Apart from Greece, the Eurozone is not an attractive place for any self-respecting country, except for those who meet Mundell optimum criteria and fit with a greater DM zone. Nobody dares open any serious debate on these issues.

    The Eurozone is in effect a powerful political ideology with many similaries to the communist movement in the 1930's. Communism allowed Russia domination over millions of other peoples. They suffered low living standards, but the system held together for many years. Anyone who opposed the system was severely sanctioned. The Eurozone works in a rather similar fashion.

  5. DiranM   March 7, 2012 at 1:47 pm

    If Greeks had any self-respect, sense of patriotism and national pride, they would have sought emancipation and departed from the Eurozone. The real issues lie elsewhere:

    Greece has had a failed developmental plan over the last 30-40 year based on total dependence on the European Union for transfer money and enhanced credit. The Greek political elite and middle class sees the European Union as a benefactor and patron. In effect, Greece suffers from entitlement dependency. Living off the EU dole, they have had no incentive to develop a productive economy and stand on their own two feet. They prefer dependency. As evident from the economic disaster going on here, Greeks cowardly prefer humiliation and economic pain clinging to the Euro currency union as a vassal state to any sort of emancipation. Let us not forget that large number of Greeks in the 1940's fought a civil war for Greece to become a satellite country under Soviet domination with very low living standards.

    Poverty and underdevelopment is a social behavior. Likewise many lower income Americans live in slums and depend on food stamps.

  6. DiranM   March 7, 2012 at 1:48 pm

    The Euro currency union was always primarily a tool of forced economic integration, rather than sound economics. It has proved a valuable tool of economic domination by the Core countries, who exercise merchantilism over the Periphery. If Greece departed and proved successful that would be a terrible precedent because then many other members of the Periphery would also follow the example and elect to leave the currency union. Forced political integration would have failed and merchantilist interests would suffer. For these reasons, the EU elite exploit fear mongering, and use threats and coercion so no country dare consider leaving the Eurozone.

    Of course, the cost of carrying Greece may prove more burdensome than the fallout from an Euro exit. There is clearly sharp internal debate between EU policy makers and political elite on this matter. They would have little incentive, however, to assist Greece thereafter and plenty of ulterior motives that Greece suffer badly as an example to other Periphery countries to keep them in line.

  7. DiranM   March 7, 2012 at 1:48 pm

    In any case, the EU has found the perfect victim in Greece because its political elite are both clueless and cowardly, perhaps even taking a perverse sado-masochistic pleasure in the suffering and humiliation just to remain part of the Eurozone. What Greeks fear the most is the challenge of standing on their own two feet.

    • Greek Economist   March 7, 2012 at 2:35 pm

      DiranM, you write: "What Greeks fear the most is the challenge of standing on their own two feet.". I think that you should substitute "Greeks" with "Greek Politicians". And they are afraid of that because they know that it will be the end of their political survival.

  8. DiranM   March 7, 2012 at 3:32 pm

    Greeks left free from the shackles of the Greek State can be incredibily productive and successful. There is a real leadership crisis in Greece. The present political leadership has failed and bankrupted the country, but they are now posing as the saviours. It is quite true that their political survival is at stake, but also the Greek Middle class is understandibly terrified of the ensuing chaos.

    Institutionally, the 3rd Greek Republic is probably at its end. Right now the risks are very high because there is really no other plan but clinging to the Euro at any cost, even years of economic marginalization and mass immigration of Greek youth.

    Should the EZ jettison Greece because of the carrying costs, no one is prepared.

  9. sierra7   March 7, 2012 at 4:28 pm

    Reading the article and then the comments makes me ask:
    "Is there any study, article reflecting what the "real Greek" common folk think????
    Academics, economists, etc……really mostly have no clue what is going on in the lives of the common folk (anywhere)…….
    Trying to force any country, almost always small ones, into one "cookie" form is going to prove disastrous……
    On the other hand, who is going to hold the larger EU economy lords accountable for the fraud that has been levied on so many people not only in Greece, but all around the world????
    That would be a good start…..
    Personally, I would advise the Greek people to tell the EU to stick their EURO where the sun doesn't shine…..and go on their own………
    Most Greeks I've known over my lifetime here in the US (as immigrants) were very savvy business wise…maybe not too sophisticated (as immigrants) but knew the value of good currency.

  10. tonyparksrun   March 13, 2012 at 9:41 am

    In or out of the Euro, politicians Greek or otherwise can not fight the demographics. The prospect of decade(s) long austerity will drive out investment and the young productive population. Wealth will go too, as it already has (if it's mobile). Don't forget the recent 'solution' is debt write down (past tense) and bail out of government debt (past tense). I don't sense the EZ has signed up for infinite fiscal transfers for the future. Ireland and the South and East European periphery will experience depopulation as the economically active & mobile seek what little work there is elsewhere. Will this suck in further immigration from the Mid-East and Maghreb to say Greece to replace displaced indigenous emigrants? Who knows? Curiously Sarkozy, egged on by Le Pen, toys with exiting Schengen…Historically, when times are hard, European populations migrate. Populations are arguably more mobile now than at any time in the past.

  11. Alexq7   July 6, 2013 at 11:25 am

    The Eurozone is in effect a powerful political ideology with many similaries to the communist movement in the 1930's. Communism allowed Russia domination over millions of other peoples. They suffered low living standards, but the system held together for many years. Anyone who opposed the system was severely sanctioned. The Eurozone works in a rather similar fashion.AHA top-essays