As its day of reckoning nears, should Greece accept that it’d be better off outside the euro?
Sam Bowman, deputy director of the Adam Smith Institute, says Yes
Greece could probably stay in the Eurozone if it had either substantially lower government debt or substantially higher economic growth. But its economy has shrunk by over 0.6 per cent in the past two quarters, and is expected to continue to shrink this year. Its debt burden is 180 per cent of its GDP. These are untenable positions.
Greece will not start to grow again until Greek workers take large real-terms cuts to their wages. Without inflation, this will be an agonisingly slow process. Leaving the euro would allow Greece to rapidly devalue and impose real wage cuts across the board. Consider how much of a boon it would be to Greece’s biggest industries, like tourism and shipping, if costs were to fall significantly.
It was a mistake to admit Greece into the Eurozone, and it was a mistake to throw good money after bad when Greece was bailed out. There is no simple solution to the country’s problems, but leaving the Eurozone would allow it to at least begin to recover.
Danae Kyriakopoulou, senior economist at the CEBR, says No
Grexit would be disastrous for Greece, definitely so in the short run and most likely in the long run too. Its immediate effects would be highly disruptive politically, meaning that much-needed reforms would be pushed back. Having already lost over 25 per cent of GDP since the crisis, Greece can’t afford a deeper recession.
The commonly-voiced argument in favour of default and a new currency is that, with a devalued currency, Greece could export its way out of the crisis. Unfortunately, this textbook benefit is currently absent. The euro is already weak(ening), and in any case Greece is not a major commodity producer to benefit from devaluation, and exports little other than tourism.
Finally, the Eurozone is heading towards closer integration with a banking union and a more supportive monetary environment. This makes Greece’s euro membership far more attractive than when it joined. Staying will be painful too, but is the lesser of two evils.