To Euro or not to Euro?

In two interviews with Hurriyet Daily News (Oct. 11) and The Saint Louis Post-Dispatch (Nov.4), Costas Azariadis advocates a suspension of all interest payments on Greek debt and a return to the drachma as a stopgap measure that will buy Greece time to debate and implement the deep reforms needed for economic prosperity.  Exiting the eurozone will instantly balance the government budget, restore competitiveness to tourism and exports and reverse the income implosion the country is going through. Default will compromise future borrowing, anger the international community and hurt the reputation of the country but costly but continued austerity makes less sense. The real risk from default is that the relief it provides will be wasted in a futile attempt to preserve the status quo and thwart the necessary reforms.

The full article of C. Azariadis:

As the Greek government teeters on the verge of collapse and the national economy is in a freefall, voters in Greece are running out of time. Despite repeated rounds of cuts and austerity, the state still cannot pay salaries and pensions to more than two-and-a-half million people whose livelihood depends on the government. Tax revenue is shrinking, international lenders insist on deep and unpopular reforms, labor unions and professional groups cling obstinately to the status quo. The most corrupt political class in Europe squabbles over power, privilege and patronage as the youth unemployment rate soars to 40%. Schools and social life are disrupted by unending strikes while crime rates shoot up and the rule of law is visibly on the wane.

Long-postponed questions are coming to the fore with an urgency that cannot be deferred. Euro or drachma? Inside the EU or out? Structural reforms or status quo? Should the public sector shrink or grow? Is the current constitution working or we need a new one? In this post we deal with the first one. Today’s big policy question is: Should Greece tighten its belt as much as its lenders dictate and stay in the Eurozone or go back to the drachma and stop paying interest on its public debt?

Luckily for voters, this question has a simple answer suggested by many independent economists like Ken Rogoff, Nouriel Roubini and by the recent experience of Argentina—suspend interest payments, drop the euro and go back to the drachma. This is a costly choice but the benefits seem to outweigh the costs. Default would save the Greece annual payments roughly equal to 6% of its GDP, and would instantly balance the government budget. Going back to the drachma at an initial exchange rate of about 600 to the Euro will immediately boost  competitiveness in exports and tourism, and reverse the economic freefall the country is going through now. Incomes will start growing again. Devaluing the drachma will also give the country breathing space to debate and implement the structural reforms that will keep it from a return to the poverty of the 1950’s.

Default is a messy business fraught with danger. Greek banks will collapse as their equity is wiped out; the state will have re-capitalize them without giving politicians or labor leaders any authority over day-to-day operations. International lenders will avoid the Greek government for many years, and the drachma will not be accepted by foreigners.  Euro deposits will be taxed or forcibly converted to drachmas or regulated by capital controls. The drachma itself will be prone to inflation because special-interest groups will pressure the government to give them bonuses, raises, pensions and other handouts. Europeans will be apoplectic for a while because their banks, too, will suffer from a suspension of payments by Greece. Worse still, fears may spread through financial markets that Italy or Spain may follow in the footsteps of Greece.  Fears of contagion can easily drive up the cost of borrowing for those two nations and thus become self-fulfilling. Dire consequences can follow for the world economy.

None of these drawbacks outweigh the obvious and immediate benefits that a suspension of interest payments would confer on the country. Greece is no more responsible for world contagion than the investment banking firm of Lehman Brothers was for the 2008-2009 financial panic. Recapitalizing European banks against default will be cheaper than bailing out Greece through a prolonged period of austerity. Argentina has recovered from its default of 10 years ago, and prospered.

The real danger of default is not that it causes friction between trading partners, domestic banks and depositors, or even international borrowers and lenders. Default is just a stopgap policy that gives borrowers time to put their affairs in order. That means spending less, working more, and planning ahead.  If Greece really wants to prosper, default will buy perhaps two years in which the country must reform itself from top to bottom, from one end to another. The real risk is that the temporary relief from exiting the eurozone will be wasted in a vain effort to maintain the status quo. This is a risk that Greece must take.

About C_Azariadis

Washington University at St. Louis

This entry was posted in Banking and finance, Europe, General, Macroeconomics. Bookmark the permalink.

34 Responses to To Euro or not to Euro?

  1. Dimitris M. says:

    The fact of the matter is that exports in Greece have only recently been positive while the wages of the public sector employees mostly, are adjusted very frequently and for a long time now. I truly believe that Greece dropping the euro as a currency and going back to the drachma or a new currency, will only be counter proodcutive for Greek exports and for the citizens’ monetary well-being.

  2. Pantelis Giannopoulos says:

    Mr Azariades i would like to ask you a question,propably a bit simplistic.I am not an economist so i don’t have knowledge of economic terms and theories so you might find a bit silly my thoughs.
    If Greece adopts drachma as her national currency,the cost of living wouldn’t drop?For example none will be able to buy a coffe costing 3 euro (propably around 1500-2000 drachmas after devaluation).That means that the seller will have to lower the price in order for someone to buy his product.The same will happen for all domestic products and services like rents.For the imported products (apart from oil) i believe that the prices are going to be deescalated,because the multinational coorporations will prefer to do so than to lose the market.For example an x mobile costs at FYROM 250 euros while at Greece the same mobile costs 400.Obviously that happens because their people can’t afford higher prices and the company doesn’t want to lose the market of FYROM.I set that example because i can’t understand why everyone says that we are going to collapse if we return to drachma.And by that means we are going to be more competitive having lower wages,more jobs are going to be created (reopening of phosphate fertilizer industry) and we will import less(increase of consumption of domestic product).

    • Costas Azariadis says:

      A return to the drachma will probably mean a pickup in the greek inflation rate relative, say, to the German one. Greek inflation was 2-10% above the rest of Europe before the adoption of euro in 2001. It has remained above the rest of the eurozone to this day because the government makes laws that regulate prices and prevent competition. For example, a cup of espresso in Athens is much more expensive than in Rome partly because wholesale margins are enormous and the transportation business is protected from competition.
      What will happen to the price of a coffee cup under a hypothetical return to the drachma is anyone’s guess. It depends on how many drachmas are printed by the Bank of Greece.
      One way to think about it is to recall what happened before the introduction of the euro. Drachma prices were going up all the time but prices expressed in german marks or dollars did not because the drachma was being devalued every year.
      If the government stops protecting wholesalers and starts thinking of consumers, even drachma prices may drop!

  3. Dimitrios Hatzinikolaou says:

    I completely agree with Professor Azariadis’s analysis.
    I want to emphasize three points.

    1. By staying in the eurozone there is no hope for growth,
    whereas by going out of the eurozone will permit us to use
    expansionary monetary, fiscal, and exchange rate
    policy, so that we will be back on growth in at most two
    years from now. The cost will be inflation. The incomes
    of the wage earners and the pensioners will not suffer
    as much as they are suffering now. The deadly costs
    of high unemployment and business closures will be
    greatly reduced. “During crisis, discount freely” said
    the economists of the 19th century. Both Monetarists
    and Keynesians agree that in a crisis action on the part
    of the central bank is needed. Thus, C. Azariadis’s point,
    which is that Hellas must resume its own independent
    Central Bank and reflate the economy as soon as possible,
    is in fact in accordance with macroeconomic orthodoxy.

    2. If the notorious “Borrowing Agreement” is ratified, then
    the ILLEGAL Mnimonion I will become legal, and our country
    will be sold out for a song. If it is not ratified, then foreign
    borrowing will stop, and we will have to go back to the drachma.

    3. According to the relative ΡΡΡ theory, the initial exchange rate for
    the drachma should be about 395 drachmas per euro. This is NOT a huge
    devaluation, as Mr. Papademos incorrectly argues. Here is why. The relative
    PPP says

    e_hat = p1 – p2, (1)

    where e_hat = %change in e = nominal exchange rate (national currency units
    per unit of foreign currency), p1 = domestic inflation rate, and p2 = foreign
    inflation rate. According to the official statistics, during the last 10 years,
    the average rate of inflation in Hellas was p1 = 3.2% (approximately), and the
    difference from the European average was about 1.5%, i.e., p1 – p2 = 1,5%.
    Thus, according to Equation (1), the average rate of growth of e was about 1.5%.
    Since the initial value of e on 1-1-2002 was 340.75, it follows (from the compounding
    interest formula) that the value of e 10 years after 1-1-2002 will be
    e2012 = 340,75(1 + 0,015)**10 = 395,454. The debt (in drachmas) will be calculated at this exchange rate, so the initial exchange rate IS important. Further devaluations of the drachma will NOT increase the nominal value of the debt. Quite the contrary, in real terms, the debt will fall, because of inflation. Panos Kammenos, the only patriot in the Hellenic Parliament, pointed out something extremely important, that I was not aware of. He said that if we do not ratify the “Borrowing Agreement,” then we will be able to repay the foreign debt in drachmas! If this is true, then our debt will become sustainable if we leave the euro, and national sovereignty will not be in danger.

    • Costas Azariadis says:

      I think you are overly optimistic about the drachmato-euro exchange rate. Elsewhere on this blog Harris Dellas calculates that a 25% devaluation is necessary before greek products regain international competitiveness. Others who take account of the potential for drachma inflation put the exchange rate at 600:1.
      Either way, a return to the drachma is a dramatic and costly byproduct of sovereign default. It will probably slow down, and perhaps temporarily reverse, the current economic freefall in Greece at the cost of curtailing imports, and shrinking foreign credit dramatically. But it will not cure the fundamental illnesses of the greek economy: low productivity, poor infrastructure, not enough people at work, rampant corruption, and a colossal public sector.
      Monetary policy cannot fix these problems–only deep and sustained reforms can.

      • Dimitrios Hatzinikolaou says:

        True, expansionary monetary policy should be accompanied with structural reforms that will enhance competition, eliminate tax disincentives and other counterproductive institutional rigidities, improve public infrastructure, fight corruption and beaurocracy, and increase productivity and competitiveness. Nevertheless, the Hellenic economy currently needs desperately more liquidity. This morning, I read in the news (in the Voria Newsletter) that the paper company Diana, which operates in Xanthi, is about to close and fire its 105 workers BECAUSE OF LACK OF LIQUIDITY. This is currently a perennial problem, as many firms cannot finance their operations (pay for materials, wages, etc.), because their customers are unable to pay them, thanks to the economic crisis, which implies lack of demand for their products. If we had our central bank — and of course, if it was run by patriots — it would be able to provide liquidity and save these firms from closing, thus keeping employment from falling further. The 105 workers of Diana, and many others like them, would not have to go home and tell their families that they are unable to feed them.

  4. Manthos Delis says:

    I could not write it better than Barry Eichengreen
    http://www.voxeu.org/index.php?q=node/729

  5. Alexandros Gortsilas says:

    1. It is unfortunate to compare Greece to Argentina, a big country, very rich in resources that had a budget surplus when it went bankrupt.

    2. All analyses I have read require major reforms for Greece to recover. If these reforms are applied in as little time as 2 years then why return to the Drachma? The time we need is offered to us by the agreement of Oct 26th.

    3. We already had 2 years (in this term) and another 5 before that to make reforms. Nothing happened. So the argument that a default will buy us time to complete all reforms necessary is at best naive. A default will make Greece a third world country for decades to come.

    • Costas Azariadis says:

      As you may recall, first-world countries like Germany and Austria defaulted in the 1920’s without joining the third world. A country’s development status does have something to do with the money it uses and its credit score; it seems to have even more to do with its institutions and infrastructure. That’s where Greece is weak and that weakness cannot be cured by staying in the eurozone.

      • Demetrios A. Pliakis says:

        It is very naive to compare Germany and Austria that are societies modelled on a different familiar scheme – according to Todd’ s methodology, Greece is not uniform even in this aspect. What really is missing in your arguments is the real economy facts: what really matters is the expertise that every nation exhibits and among other facts is based on the qualities of the people. Germany produces the most reliable industrial machines due to the discipline of the german industrial worker. British workers
        are distinguished for their innovations etc. Greek workers -except ship captains and engineers, are not known for any other expertise. Of course Rogoff, Roubini etc talk about the stock market economy and not the real economy producing real products.

        • Costas Azariadis says:

          One way to measure the productive capacity of the “real economy” is by the infrastructure it has. That term covers some private and all public capital (power and telephone grids, optical fiber, highways, airports, etc) as well as most forms of”human” capital like workers skills, technical knowledge, health.
          Germany has a good infrastructure; Greece does not. That’s one important reason–but not the only one–Greece exports so little and Germany so much.

  6. Eleftherios N. Botsas says:

    Greek Debt
    There are some contradictory outcomes in cases of default. One conclusion is that “the real danger’ of default is not that it causes friction between trading partners, domestic banks and depositors, or even international borrowers and lenders” default affects the process of re-integration in the international economy. Comparisons between Greece and Argentina are completely misplaced, one is a small economy traditionally integrated in the European markets East and West, and the other is an economy of continental size. “Default is just a stopgap policy that gives borrowers time to put their affairs in order” assumes that learning from experience is not feasible in a highly integrated economy. That means spending less, working more, and planning ahead.
    We have seen statements like those of George Friedman, in his “Europe, the International System and a Generational Shift” http://www.stratfor.com summarizes the opposite perceptions of Greeks and Germans with respect to each other in the following way: “For the Germans, the Greeks were irresponsible profligates. For the Greeks, the Germans had used the EU free trade and monetary system to tilt the European economy in their favor, garnering huge gains in the previous generation and doing everything possible to hold on to them in a time of trouble. For the Germans, the Greeks created a sovereign debt crisis. For the Greeks, the sovereign debt crisis was the result of German-dictated trade and monetary rules. The Germans were bitter that they would have to bail out the Greeks. The Greeks were bitter that they would have to suffer austerity. From the German point of view, the Greeks lied when they borrowed money. From the Greek point of view, if they lied it was with the conscious collaboration of German and other bankers who made money from making loans regardless of whether they were repaid.” I do not read German,but from what I read in the Greek press this is an accurate description of the mutual blames placed on who is responsble for the debt.
    Fundamentally, the interest of the Greeks is in achieving some degree of equilibrium in their international sector, whether it is in drachmas or euros. However, a resurrected drachma is the worst remedy for the illness of the Greek economy. Finding a new exchange rate to a national currency which has been an appendix to the euro for over a decade is not an exercise in paper work. We are talking about real people and real economy.But resurection of the drachma has become a strong symbol of rising nationalism in Greece. Europeanism has not succeeded in reducing nationalism in EU.
    The fundamental interest of Germany is in an expanding EU economy to absorb the German productive capacity, a produtive capacity that keeps expanding, no matter what the problems of the periphery are. The two economies are very dissimilar in their production as well as consumption functions. When the Greek economy was expanding in the 1960s and 1970s, the two economies appeared to be complimentary, not antagonistic. The current European problems seem to support the rise of nationalism all over Europe. Whenever national economies face problems of disequilibrium blaming the strong neighbors becomes fashionable and dangerous to deeper integration.

    • Costas Azariadis says:

      Milton Friedman, and many others since, identified the euro’s greatest weakness as a potential co-ordination failure between one money and many fiscal authorities. Spending and taxation patterns differ considerably across the Eurozone, and a common monetary policy cannot serve seventeen different masters. It looks like the eurozone will splinter unless member nations can convince markets soon that they are committed to harmonizing their finances.

  7. The Greek Euro-question seems primarily political instead of economic. A Euro-exit at this time would carry an extremely high political risk. Just imagine: a population which – after 10 years of living in paradise – has now taken financial beatings for 2 years and is preparing for another 2 years of such beating. And suddenly, in the midst of that, Greece exits the Euro and all domestic financial assets are worth 30-40% less (or even more). Banking deposits alone amount to roughly 200 billion EUR, not to even think of pension funds, etc. Would this not lead to anarchy?

    A few weeks ago and a bit in an Ouzo mood, the thought crossed my mind that Greece could introduce the Drachma as parallel currency to the Euro. The more I have thought about it then, the more I wonder why this would not be an idea which one should give further thought. I look forward to reactions. Details on my “Ouzo-thoughts” are in this link.

    http://klauskastner.blogspot.com/2011/10/thinking-aloud.html

  8. David Leith says:

    It strikes me that the deficit economies within the Eurozone are really in a monetary/fiscal trap. Considering the dynamics of their economies……

    They are in chronic external imbalance and therefore cannot grow their way to fiscal balance. In fact, growth – even if it could be generated – will only increase the magnitude of their debts, which tend to manifest in their public sector. Nor can they shrink their way to fiscal balance, as austerity drives down revenue faster than it drives down spending. Because the public sectors have exhausted their debt-service capacity, the private sector can no longer finance public sector deficits and, by a feedback mechanism, this is now driving balance-sheet stress in the private sector as well as the public sector. The ECB, meanwhile, lacks the capital, the political consent and the legal authority to support the deficit-struck sovereigns.

    It it obvious that this will generate economic paralysis, and soon spiral into outright deflation followed by more or less perennial stagnation in all the economies West of the Rhine and South of the Alps. In my opinion (and I’m sure I’m not alone) this is a consequence of the design of the Euro monetary system, which functions in much the same way as the Gold Standard once did. That is, this system can only remain stable as long as all economies are in external (net income) surplus more often than not. Since this is obviously a mathematical impossibility, the Euro-system is structured to generate fiscal and economic crisis. What we are witnessing now is the direct monetary descendant of the kind of fiscal/credit/economic crisis that recurred so often before the development of modern central banking. In such a monetary order, economic growth leads inexorably to unsustainable debt expansion in deficit economies, which leads to insolvency, which results in liquidation and collapse. This was a familiar cycle in the good old days when economies relied on an external value reference – Gold. These days, they rely on a synthetic but still external value reference – the Euro.

    As such, the current crisis in Europe will only be relieved when the deficit economies dis-integrate their economies from the Euro-mechanism and resume issuing their own currencies once more. Only then will they be able to go through devaluation and reflation, leading to the restoration of fiscal stability and a return to full employment.

    • Costas Azariadis says:

      I agree with your analysis, esp. with the first and last paragraphs. Let’s hope that nothing worse will happen than what’s described in your last two sentences.

  9. charles sereno says:

    Perhaps I missed it in previous comments, but isn’t the elephant in the room (with default) buying $Oil with drachmas? Hardly enough to supply scooters much less an economy.

    • Costas Azariadis says:

      Not really. Greece bought lots of oil before it joined the eurozone and will buy lots more if, or when, it quits that zone. Income from shipping and tourism usually pays this bill.

  10. Yannis Ioannides says:

    I agree with the statement by Jose that:
    “I don’t think the initial exchange rate for the drachma would be relevant at all.” So, what matters is expectations about the future. Yet, their formation is not completely unencumbered by the past and the present.

    I also agree with the spillovers argument by Filippos Petroulakis, that Argentina then and Greece now are in very different positions in the network of interdependence, now at the heart of the eurozone crisis.

    And, having read Thanasis Stengos’ comment, I continue to be just as skeptical of Greek politicians’ arising to the occasion. They would still have to stand behind outstanding technocrats, whom they could always appoint to key positions.

  11. Lou Bougias says:

    Let us examine some of the current benefits that the Greeks are enjoying because of the EURO, and our lack of responsible and accountable government.
    All figures are approximate, but within 5%.

    1. 365 billion EUR debt.
    2.An annual tax revenue base of only 52 billion EUR.
    3. An annual interest repayment of 24 billion EUR.
    4. 16.7% ‘OFFICIAL”unemployment rate.
    5.No manufacturing/industrial base worht discussing.
    6. 800,000 public servants in a working population of 4.25 million.
    7.A rapidly decling property bubble.
    8. I don’t need to go on much more, I am certain you all get the point.

    Leaving the EUR, declaring some sort of bankruptcy/default, restoring a responsible system of governmnet, and enforcing the rule of law, which is greatly abused, ie corrupt politicans and removing their immunity from prosecution, is the only answer for Greece to move forward. Papandreou,Venizelos and the vested interests of the political parties and the interests who support them have destroyed Greece.

  12. Jose says:

    I don’t think the initial exchange rate for the drachma would be relevant at all.

    It it is 1000 to 1 euro that would mean the economy would be measured as producing 240 trillion drachmas of goods and services a year; if the rate is defined as 1 drachma per euro then the economy would be worth initially 240 billion drachmas. So what? It’s just the measuring rod that changes, not the real economy.

    What matters is what happens next, one second after the new drachma starts trading in foreign exchange markets. Operators will mistrust the new currency meaning its price in euros will drop perhaps dramatically. And that is precisely what Greece needs if she wants to restore her international competitiveness.

    So stop worrying about the initial exchange rate. It simply does not matter.

  13. I agree with most of the thinking in this piece save one sentence.

    The author says that the Drachma will trade at about 600 to the Euro post default. Why? The old rate was 340 but that was ten years ago. Much has happened since then. I see little basis for that 600 number.

    Do the math on this at 1000 or higher and you will see how problematic a return of the Drachma will be.

    Inflation would be very high at 600. It would be crushing at 1000.

    We may well end up with a drachma and a default. It would be a mistake to think that this could happen without a great deal of pain.

    • Costas Azariadis says:

      Comletely agreed. Markets will find the correct exchange rate. 600 was my guess about that rate, assuming a no-inflation policy by the Bank of Greece.

  14. Filippos Petroulakis says:

    Another distinction that has to be drawn in the Greece – Argentina analogy, which is not stressed enough I think, is the vastly different global macro environment of the two eras. In 2002, the US was exiting the dot com bubble but that was brief and painless, China was booming, buying most of Argentina’s soy and beef production, and Europe was starting to experience easy money. On the whole, world economy was growing and consuming.

    This clearly isn’t the case now, which would hamper even more the only thing Greece can export, tourism, which is essentially a luxury. Greece is much more important systemically now than Argentina was then, it is not an isolated case, and, through the effect a default will have on the confidence of markets concerning Italian and Spanish defaults, effectively has a much larger counterparty risk. So if a new global crisis is precipitated by a Greek default, which surely seems to be the case now, combined with a possibly too large drachma devaluation, the benefits of default could be neutralised.

    • Costas Azariadis says:

      I agree that default is a stopgap that will lead to nothing unless Greece undertakes deep social and economic reform that starts with a new constitution and with a war on corruption. If the country is serious about reform, a return to the drachma will buy some time and will ease the pain from adjusting new economic realities.

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  16. With due respect to my good friend Costas Azariadis, I beg to disagree with this sentence:

    “None of these drawbacks outweigh the obvious and immediate benefits that a suspension of interest payments would confer on the country.”
    The benefits might not be so immediate.

    It is correct that “Greece is no more responsible for world contagion than the investment banking firm of Lehman Brothers was for the 2008-2009 financial panic.” Yes, but just as the panic started long before September 2008, Greece’s problems too might not be easy to wipe out by devaluation.

    We should do the math on
    ” Recapitalizing European banks against default will be cheaper than bailing out Greece through a prolonged period of austerity. ” It is not obvious to me.

    “Argentina has recovered from its default of 10 years ago, and prospered.”
    Argentina’s case is more complicated. Let me be specific.

    This provocative position needs to be argued, but the case of Argentina is not comparable with that of Greece. I dont have all the specific facts about import and export elasticities and the like, but going back to the drachma is no panacea of any kind. Of course, Costas Azariadis, one of the best teachers I have ever had, is certainly aware of many of the things I am going to talk about here, but it is nonetheless very important to debate them in public.

    To start with, going back to the drachma at an initial exchange rate of about 600 to the Euro is very optimistic. The pre-euro experience was “contaminated” by arguably temporary inflows of funds from Brussels, which helped maintain what many of us thought was an overvalued currency, which then provided the basis for setting accession to the monetary union at 340.75 GDr to the euro. If those inflows were to disappear, I can easily see an exchange rate closer to 1000 GDr to the euro, and possibly much greater than that, too. Under a pessimistic scenario for the exchange rate of the drachma to the euro, an offer by Greece of 35 cents to the dollar (as Argentina did) would still leave the debt at about where things are now (in real terms). None of these thoughts is a substitute for a quantitative analysis that ought to be done.

    Second, Argentina would not have been where it is right now, were it not for the beneficial and totally unanticipated favorable improvement in the terms of trade of its main exportable goods which occurred in 2003. All discussions of Argentina emphasize that. Could Greece dream of anything like that?

    Third, 10 years later, Argentina has yet to fully enter the financial markets. Last week’s article in the Economist was quite informative. Argentina has survived because of its very robust export sector. In 2007, Argentina’s GDP in current US$ was 261 bn., its exports 56 bn (or 25% of its GDP), and its imports 45 bn. Greece, on the other hand, exports about the same share of its GDP, but has a much greater share of imports, 35% in 2007 according to IBRD/WDI data. One of Greece’s main exports is tourism, which requires a lot of imports in order to offer quality services.

    Moreover, labor and other unrest, as we know from last summer, can create havoc in the tourism sector. If Greece were to default, there would inevitably be some rough period of time, during which financial and economic autarky would disrupt significantly economic and social life. Greece is importing a lot of foodstuffs, including lemons from Argentina and garlic from China, but mainly from the EU. And even with a vastly favorable exchange rate, the fundamentals of why there is little investment in Greece would not change, and worse yet, there may be no incentive for them to change. The disruption could last for many years, too.

    I agree that given how unpredictable Greek politics are, we might not have the luxury of being able to study in depth the full impact of Greece’s abandoning the euro. Greece may be forced to, or even choose to, exit the common currency. But, to me “not to euro” looks like a very risky option.

    If a temporary exit could be negotiated, which is in fact what Martin Feldstein advocated in January 2010, then perhaps the magic of a devaluation could be entertained. But, I dont see how, given the complexity of the financial interdependence of eurozone countries, a temporary exit could even be contemplated.
    While at it, how prepared are we to trust the newly revamped and newly independent Bank of Greece?

    As I have started arguing elsewhere in this blog (and will continue in more detail) , one of the unthinkables that have to be brought to the fore is forgiving official debt, which might be necessary to rescue the eurozone. That too is a big step, but it could be a precursor to greater political integration. The specter of failure of the eurozone looms so large at the moment, and it might force publics and governments in Europe to rethink things.

    There exist other options, too, including letting up on austerity in recognition of the extensive spillovers among the economies of the EU. The EU as an entity is quite close, but that obscures the extraordinary extent of intra-EU interdependence among EU countries. This is a powerful argument in favor of intra-EU macropolicy coordination, as Paul Krugman has recently reminded us. Depreciation of the euro would also work marvels, accordingly.

    There is no doubt, euro is an expensive currency. Costas Azariadis deserves credit for forcing us to think about “not to euro” as a policy option. Let us continue the debate. But so far, I am not at all optimistic about “not to euro.”

    • Thanasis Stengos says:

      I tend to agree with Yannis Ioaniddes and to be sceptical of the proposal by Costas Azariadis. I think the main issue centers around what Costas Azariadis includes in his last sentence:

      “The real danger of default is not that it causes friction between trading partners, domestic banks and depositors, or even international borrowers and lenders. Default is just a stopgap policy that gives borrowers time to put their affairs in order. That means spending less, working more, and planning ahead. If Greece really wants to prosper, default will buy perhaps two years in which the country must reform itself from top to bottom, from one end to another. The real risk is that the temporary relief from exiting the eurozone will be wasted in a vain effort to maintain the status quo. This is a risk that Greece must take.”

      It is however very doubtful from what recent Greek economic history has taught us that Greek politicians and Greek economic agentss will perceive this change as only a stop-gap period of adjusment. It is more likely that they will look at it as a premanent state of affairs where inflation, business as usual with an expanding state and ignoring the supply side of the economy entirely in favour of “progressive” demand side measures will prevail. I think despite the pain of being in the euro zone right now for Greeks the only way forward is to go through the pain and the prospect of having the EU overview the necessary painful steps leaves me more confident that finally there will be light at the end of the tunnel.

      However, having said that I think Costas Azaridis ‘s piece is very useful and important in that it puts this option on the table for everyone to see the options that we are facing. In fact the listing of all the negatives from a default attests to that.

      • Costas Azariadis says:

        I agree that the drachma is not a panacea but, then, neither is the euro. If we are to believe Transparency International, corruption flourished during Greece’s ten years in the Eurozone.
        And inflation over the last ten years was no better, at just below 4% annually, than it was under the drachma between 1953 and 1973.
        Is it obvious to you that the benefits from continued membership in the Euro are worth an 18% unemployment rate? And even if they are, what do we do when unemployment reaches 25%?

        • Sanima says:

          […] in Greek CDS ctrtnacos that were sold in December of 2009 by the Hellenic Postbank. Coupled with the firm's prompt denial, I believe it is only fair for us to now ask the question of why no evidence has been presented. I […]

    • Mr. Eclectic says:

      Actually, as it is demonstrated in the following article:

      http://www.voxeu.org/index.php?q=node/7055

      a large factor towards the Argentinian recovery was the fact that the corporate sector benefited by the conversion of their debt to the new devalued currency and the cheaper cost of assets acquisition and investments.

      Not optimal or moral, but it worked.

      • Costas Azariadis says:

        I disagree. The politics of abandoning the euro may seem complicated but the economics is not.
        Economic theory says that a change in the unit of account (that’s the name we give to our money) is neutral. In practice, that means a currency union like the eurozone confers very small benefits on its members over and above the considerable gains from trade they already have from the customs union called EU. Small benefits include saving on trips to ATM’s when abroad, on forex insurance, and on some paperwork.
        Are you sure these tiny conveniences worth a 45% youth unemployment rate? Greece should certainly stay in the EU but the eurozone is quite another matter.

  17. Pingback: Feature: Greece and the Euro | Greek Economists for Reform.com

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