30 June 2015

VoxEU: Greece can still avoid a catastrophic exit from the Eurozone

Grexit and the reintroduction of the drachma would have severe consequences for the Greek people. This would produce a sharp devaluation of the drachma, inflation, and a severe reduction in real wages and pensions.

The effects would be far worse than the reductions that could have occurred as a consequence of the policies proposed by the Troika. By resuming negotiations, continuing with measures to achieve fiscal consolidation and carrying out adequate structural reforms, Greece could reverse the current situation in a sustainable way. It has the great advantage that the ECB, most European governments and the IMF are willing to resume negotiations.

Greece has imposed exchange controls and restrictions on withdrawing cash from its banks. Once negotiations with the Troika got interrupted by the decision of the Greek government to call a referendum next Sunday, Greece had no alternative. Leaving the banks open would have led to a complete collapse of its banking system. Argentina had to do the same on 3 December 2001, after the banks ran out of US dollars that the public had been withdrawing since the end of 2000. The restrictions were popularly termed the ‘corralito’, or ‘little fence’.

 

Given the Argentine experience, the worst for the Greek people has not yet happened, and can still be avoided. What produced a sharp deterioration of real wages and economic activity in Argentina was the compulsory conversion of dollar assets and debts into pesos at the pre-existing exchange rate. This forced conversion was decreed in January 2002, after the fall of Fernando de la Rúa’s government. This was popularly called the ‘corralón’ or “strong fence”. The ‘corralón’ provoked a drastic fiscal adjustment and deterioration of the standard of living of Argentineans as a consequence of the inflationary burst that followed the massive devaluation of the peso. It was the worst and most unequitable redistribution of income and wealth in Argentina’s history.

Full article on VoxEU

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