Thu, May 17, 2012 - Page 9 News List

Expert views on Greece’s possible exit from the eurozone

Europe’s ruling elite is now openly talking about whether Greece might quit the euro, breaking a two-and-a-half-year taboo

The Guardian, LONDON

Illustration: Mountain People

German Chancellor Angela Merkel and EU President Jose Manuel Barroso are among the European politicians saying that if Athens could not abide by the rules, it would have to leave the eurozone.

The Guardian asked three experts to analyze the potential consequences such as collapsing banks and soaring inflation, but also possible salvation.

The expert view on what could await Greeks through a separate negotiation.

BY COSTAS LAPAVITSAS

A Greek exit from the euro is approaching and it has little to do with state incompetence. The fundamental reason is cumulative loss of competitiveness for Greece and other peripheral countries, mostly because Germany has kept its labor costs frozen for years.

Since 2010 things have become worse as austerity increased the burden of debt across the eurozone. Greece can no longer handle the discipline of European monetary union, while Portugal, Ireland and Spain are likely to follow.

A Greek default and exit would remove the pressure of debt, boosting competitiveness, lifting austerity and allowing for proper restructuring of the economy and society. In the medium term, the results would be better, but in the short term the shock would be severe — made worse by two years of “rescue,” which will have brought a 20 percent contraction of GDP and 25 percent unemployment by the end of this year.

The first step for Greece should be to denounce the bailout agreements and default on its debt, opening the path for aggressive cancelation. Exit would follow, presenting three sets of problems: monetary, banking and commercial.

The main difficulty of policy would be to keep these separate as far as possible.

Briefly put, the return to the drachma should be sudden, accompanied by a short bank holiday and an immediate imposition of capital controls. For a period, the new drachma would circulate in parallel with the euro and possibly other state fiat money.

There are 35 billion euro banknotes in Greece, mostly under mattresses. If they could be mobilized, a lot of problems would be made easier.

Banks would find themselves in the firing line as assets and liabilities would have to be converted. To protect depositors, but also to control credit in order to prevent a wave of company bankruptcies and to support employment, banks should be immediately nationalized. The Bank of Greece should rapidly build mechanisms to generate liquidity independently of the European Central Bank.

The exchange rate of the new drachma would collapse in the open markets, making it difficult to secure supplies of oil, medicine, foodstuffs and other goods. As far as possible, the exchange rate should be managed — there should also be administrative controls to ensure that vital goods reached key enterprises, as well as the weakest, during the first critical months.

After the initial shock, the fall in the exchange rate would prove positive for the economy. Greece remains a middle-income country with a substantial productive sector that could recapture the domestic market once imports became more expensive. There is plenty of productive potential in Greece.

What the country truly needs is an industrial strategy, as well as redistribution of income and wealth. That is also why default and exit are necessary.

Costas Lapavitsas is professor of economics at the University of London.

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