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A familiar argument in favour of a forced exit is that Greece has failed to reduce its budget deficit. True, the deficit remains high and public sector reform is struggling. Yet, if one focuses on the improvement so far, a different picture emerges. For example, Greece cut its total primary budget deficit by 8.2 percentage points of gross domestic product over two years (2010 and 2011).
Of all Greece’s many problems, including austerity, the threat of leaving the eurozone is the most damaging. Even healthy, efficient Greek companies have suppliers demanding cash for imports. Foreign clients are turning their backs, saying, in effect, “we are happy with your business but don’t know whether you’ll be around for long”.
The solution is not a Greek exit but growth. A two-year extension of fiscal adjustment, as reportedly sought by the Greek government, would moderate the impact of austerity. Greece can return to growth through a double boost of faster structural reforms and a direct investment stimulus. EU instruments such as structural funds and more money from the European Investment Bank and the European Investment Fund would help.
But isn’t uncertainty surrounding Greece in itself destabilising? Perhaps, but a Greek exit from the euro would be even worse. If Europe were to accept a Greek exit it would raise the risk of full eurozone break-up. The claim to an irreversible monetary union would be shattered. The eurozone would surrender to endless speculation over which country would be next. Depositors would start a run on banks in other peripheral countries and panic could ensue. Bailout programmes would be overwhelmed by the instinctive response of frightened investors.
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