A Grexit is starting to look more feasible for Athens

By Wolfgang Münchau

I would like to ask all of you not to continue at this time this discussion on a new haircut … It is not in your interest.”

So said Wolfgang Schäuble in Athens last week. I do not blame Germany’s finance minister for refusing to discuss a Greek debt write-off at this time. His country’s federal election is only two months away. Given Berlin’s approach to crisis resolution, I struggle to think of a more certain way to lose the vote than to say: “All right, then, let’s start to be realistic right now.”

But Mr Schäuble went a step further in his remarks by raising the Greek national interest. It is, of course, for the Greeks themselves to define their own interest.

The most one could do as an outsider would be to try to speculate about a narrower version of this question: would it be economically rational for Athens to follow the path outlined by Mr Schäuble? Alternatively, should it get ready to leave the eurozone? Or try to default inside the eurozone?

The main difficulty one encounters when answering the question is the underlying assumptions about the nation’s future policy options. It may well be that the Greek government has received unofficial assurances that do not correspond to what the rest of us know. In private conversations with policy makers, I only rarely encounter someone who tells me with a straight face that Athens could stabilise its economy at full employment while happily servicing its current debt in full. Maybe the Greek prime minister has private information that the eurozone would agree to debt restructuring after all, further extensions of the existing loans, further reductions in interest rates, a combination of all three and more. The rest of us, however, would have to assume that future policy is close to Mr Schäuble’s version.

Assessing the narrower economic preconditions for an exit is easier. A country would find it hard to stage a unilateral exit from a monetary union if its primary fiscal balance – before payment of interest – was in a substantial deficit.

In its latest spring forecast, published in May, the European Commission estimates a zero primary fiscal balance for this year and a primary surplus of 1.8 per cent of gross domestic product for 2014. From an economic point of view, the point at which Greece could risk an exit is certainly getting closer.

If Greece were to depart, it would be cut off from external funding. It would presumably not service its foreign debt, at least for a while. It would then introduce its own currency during an enforced bank holiday period. There would almost certainly be a recession in the ensuing period, but a real depreciation could bring back growth in the future. The single largest benefit would, at least initially, come through a boom in tourism.

But would this be enough? Can we be sure of it? The biggest economic argument against an exit in the past, quite apart from the funding problem, has been the almost total lack of an upside. The country did not have a functioning system for tax collection. Labour market cartels meant that the perceived benefits from a nominal devaluation may never have come about. The immediate gain in competitiveness would have been absorbed by wage increases, leaving the real exchange rate unchanged.

So one needs to ask to what extent past and present reforms have altered the robustness of the economy. My hunch is that they have done so, especially in the way the public sector works, but more is probably needed.

My criticism of eurozone policy towards Greece is not the harshness of the adjustment but its fundamental macroeconomic illiteracy. At its heart lies the delusion that Greek debt could be rendered sustainable. But the reforms – and, yes, the austerity as well – were inevitable. There is an irony in this. Reforms and austerity constitute simultaneously a precondition to stay in the eurozone, and a precondition for a departure.

This leaves Greece with two options. The first is to reform and default inside the eurozone – a strategy that requires willing accomplices in other European capitals and in the European Central Bank. The second is to reform and default outside the eurozone – a decision Greece could take unilaterally, provided the macroeconomic conditions are right.

The second has not been possible – until now. But Mr Schäuble’s option of reforming and not defaulting makes sense only from his point of view. It is not an option for Greece.

Of course, the realisation that a departure from the eurozone may be economically feasible, or even advantageous, may count for nothing.

A country may decide to stay inside the eurozone for political or security reasons. But surely we are at a different stage of debate when an exit becomes economically viable.

That has not been the case so far. Not for Greece, nor for any of the other countries in crisis. And when there is real choice, outcomes become harder to predict.

Πηγή: Financial Times