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16 May 2012

Bloomberg: If Greece quits euro, its ruin will be pointless


This article says that Greece's exit from the eurozone would be no less catastrophic than when the EU called it unthinkable -- and not just for Greece.

The economist Barry Eichengreen, the leading authority on these matters, has argued the eurozone exit would provoke “the mother of all financial crises”. The contemplation of this possibility by EU leaders is making matters even worse. Greece has no chance of recovery while this danger hangs over its economy.

The other side of a devaluation -- and a necessary condition for its success -- is higher import prices and hence lower real wages. But resistance to the latter is why Greece is rejecting “austerity” to begin with. Once Greece has its own currency again, it can resist falling living standards by printing money. That would neutralise the gain in competitiveness and lead, in the worst case, to hyperinflation.

EU officials have been saying that Europe’s financial defences could withstand Greece’s exit and full default. It has been true all along that Greece is small enough to pose no systemic threat in its own right to the wider EU economy. That’s why the EU’s decision to allow this crisis to persist and worsen is such an amazing case of incompetence and irresponsibility.

There are two main channels of contagion from a Greek exit. One runs through Greek debts to foreigners. This is probably manageable, even though the EU’s assurances about the soundness of its banks and the adequacy of its preparations are, on the evidence to date, grounds for panic rather than confidence. Certainly the EU’s wider financial system has had time to prepare. The real danger is through the second channel. If Greece can exit the euro, why not Portugal? Why not Spain? Why not Italy? Even if the consequences of a Greek exit are as horrendous as suggested, those outcomes will no longer be “unthinkable”. The break up of the entire euro system will become a choice, however unattractive, rather than something that just can’t happen.

Full article



© Bloomberg


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