Default and euro exit will destroy Greece

2011-09-23

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The euro cannot possibly be a dilemma for Greece or for the other Europeans. The costs of losing the euro are many times more than the benefits of living without it.

One of the proposals that is put forward to deal with the spiraling depression in Greece, is an orderly exit from the euro and a formal default. This view has been put forward by many world renowned investors and economists. The advocates of this proposal actually believe this is a viable solution to the problems of Greece and to the crisis of the euro. I hold that their views are based on principles otherwise we should start speaking of speculation, but I will not go into that discussion. For me what matters is the idea, and this idea is logically flawed, dangerous and self-defeating once viewed in the broader context of the systemic crisis of the euro, in the profound difference between a currency union and a fixed exchange rate, in the fact that Greece will have to impose extremely strict protectionist measures to counter the huge trade deficit it has. Here we need to clarify the distinction between an orderly default within the context of the single currency and a default accompanied by an exit from the euro, the latter is by all means the worst case scenario for Greece itself and for the euro as a whole (see Greek default: Optimal and suboptimal choices – Full analysis).

Once all parameters are taken into account we realize that an exit from the euro will lead to hyperinflation and stagnation (thus a deep stagflation), which implies that the plutocracy of Greece and the foreign “investors” that now keep their money outside the borders will be able to bring it back and rape the country and the middle and lower classes from whatever riches they have at ridiculously low prices. This in practice means that Greece, the moment it exits the euro, will be gravely exposed to the “killer instincts” of those who will come to plunder the society and the country.

Greece’s exports amount to around 20-25% of the value of its imports. It imports way more than it exports. This is a non-sustainable trade deficit due to the structural flaws of the euro, but will become even worse if Greece reconstitutes the drachma, since the new Greek currency will depreciate to such extend that practically no import will be possible. Consider the ramifications this would have on technology, health, agriculture (yes even agriculture), national security etc. I do not wish to cultivate ghosts, but it is clear to me that such a situation will deprive Greece from the ability to even stand on its own feet, whatever this might imply for all multi-faceted national and social issues.

Now consider the catastrophic implications an exit of Greece from the euro would have on the rest of Europe (let alone the default that will trigger a shock wave of mega proportions that will strike at the heart of the Euro architecture). Once Greece exits the euro, apart from the internal consequences I mentioned above, there will be immense pressure on Ireland and Portugal, thanks to speculation, on their government bonds and on their prospects of following a similar path away from the euro. In practice this means that no matter how well the fiscal consolidation policies are implemented in these countries and no matter how well they meet or exceed their targets, the markets will remain unsettled and highly uncertain of their ability to recover in the longer term, given that the broader euro area remains in this overall crisis that gradually spirals (that is concealed by a conspiracy of silence from our leaders).

Those who believe that Greece can exit the euro without causing chaos to the rest and committing suicide are simply underestimating the very nature of a currency union and degrade the catastrophic implications such an action would cause (see The catastrophic implications of Greece and Portugal exiting the euro). An exit from the euro will not lead anyone back to the pre-euro era, but to a whole new, very unpleasant reality and this is something that the political opposition in Greece should realize, not for the sake of supporting Papanderou’s government or the austerity policies, but for the sake of uniting their voice in order to change the terms of the bailout. The nihilist criticism they now do, together with the delusional ideas they put forward are detrimental for the country and its people.

Whatever flaws the euro edifice might have (I have been criticizing them all the time), no matter what ideological approach one might have vis a vis the EU and the single currency, everyone must accept today that the single currency is in fact protecting Greece from an even worser crisis that would no doubt resemble the sort of agony that is found in some of the poorest parts of the globe.

The euro cannot possibly be a dilemma for Greece or for the other Europeans. The costs of losing the euro are many times more than the benefits of living without it. What we can discuss and what can be put forward as a collection of options is ways to deal with the systemic crisis, to stimulate growth, to recapitalize and revitalize the now quasi-bankrupt European banking system. Ways to escape from the austerity vortex that we are being sucked into, with under-investment in the entire Euro area being way lower than in other parts of the world, which will only leave the EU behind as other markets emerge.