Finally, a mainstream economist who agrees with me that Greece must leave the Eurozone

In Friday’s edition of Slate, an article by economist Nouriel Roubini appeared with the title, Greece Must Go: The nation is likely to leave the eurozone sooner or later. Sooner is better. Thank you. I had been saying the same thing from at least July of last year, when I stated:

The important thing for the EU is not to save Greece – it is all but lost – but to teach the other PIIGS (Portugal, Ireland, Italy and Spain) a lesson. The EU can do without Greece. 

Some sample quotes from Roubini’s Slate column:

Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression.

A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

Economics teaches us that the worst way for a government to interfere with its economy is to set prices. With the Euro, the EU is manipulating the most important price of all – the price of money. The price of the Euro is appropriate for Germany; it is too high for the siesta culture of the Mediterranean. At some point, the resulting imbalance has to balance. That point is now.

Of course, the process would be traumatic, and not just for Greece. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks, and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “peso-fied” its dollar debts.

Some argue that Greece’s real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation. But that is logically flawed: Even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression. And trade losses imposed on the eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2 percent of eurozone GDP.

Bankruptcy is an essential part of the healing process in a free market system. Bad debts can’t be allowed to fester. By preventing bankruptcy, all you do is to prolong the recession. This is why Japan’s ‘lost decade’ is entering its third decade. The TARP bailout has played a similar role in the Great Recession. By preventing bad banks from going under, the federal government has ensured that the US economy has flat-lined for over 3 years.

Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial. Other peripheral countries already have Greek-style problems of debt sustainability and eroded competitiveness.

As the Rev Jeremiah Wright is fond of saying, “the chickens are coming home to roost.”

The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth. As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.

Another example is the US recession of 1920. President Warren Harding’s policy was to do nothing. The result was an intense but short recession. Why was that depression short-lived? Because the bad debts were allowed to clear.

But hey, who needs free market solutions when we have access to Keynesian pump priming? Sure worked well to keep the Great Depression going for a decade. 

 

Comments

[WiseGuy]

There is one other factor that may play into things. Attitude.

I just came back from Belgium where you quickly discover that 99% of all business stops at 5:00pm. While the pumps at the gas station will still work if you have a credit card, you will find it hopeless to buy a can of pop or a road map at the gas station "convenience" store. Every one, without exception, was shuttered at 5 sharp. No competition, no interest in providing a convenient service to make your place better than the other guy's. All prices, double their counterparts in North America. Parking lots are non existent and every street is permanently lined with parked cars and those waiting for a space to open up. disused bike lanes are everywhere, and the landscape is littered with idle wind turbines on a calm hot day. A liberal paradise.

Compare this with Eastern Europe, the Czech Republic, where competition is healthy and strong, stores open long hours to keep up with demand. New small businesses have opened up everywhere, since unemployment is still high but regulation is almost nonexistent. It is exciting and vibrant.

I plan to never return to Western Europe (except perhaps to view it from the safe distance of a cruise ship). It's that bad.