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Martin Wolf offers an excellent analysis of how the Greek voter may feel about Sunday’s referendum.1 There is no good option: either be engulfed in the chaos following the rejection of the programme, exit and collapse of the economy or accept another programme.
On one account, however, Mr Wolf’s gentle optimism may be disappointed. He suggests that the cost of exiting might be temporary and offset by the benefits of the ensuing devaluation in terms of increased competitiveness and exports. This is indeed what one would expect from a small open economy, where the export sector is important and benefits from lower domestic costs.
Unfortunately, Greece is a rare case of a small quasi-closed economy. Exports now account for about 30% of GDP, but a large part of this consists of oil and global maritime transportation services. Since Greece is not an oil producer, oil exports are in reality just re-exports with little domestic added value. Similarly global maritime services do not employ Greek sailors and also have no connection with the domestic economy. This means that the part of exports that is really sensitive to domestic prices and wages is rather small. This particular composition of Greek trade explains why the two adjustment programmes failed to deliver. It was not because wages and prices did not adjust. Wages have already fallen by more than 20%, but exports have barely moved. The Greek economy is thus unlikely to benefit much from a further devaluation.