Posted by: Dirk | July 1, 2010

Roubini on Greece

Nouriel Roubini has a comment in the FT. He compares Greece to Argentina:

Compare Greece today with Argentina in 1998-2001, a crisis that culminated in a disorderly default. Argentina’s fiscal deficit at the onset was 3 per cent of GDP; Greece’s is 13.6 per cent. Argentina’s public debt was 50 per cent of GDP; Greece’s is 115 per cent and rising. Argentina had a current account deficit of 2 per cent of GDP; Greece’s is now 10 per cent. If Argentina was insolvent, Greece is insolvent to the power of two or three.

Mr. Roubini has worked for the IMF, and his opinions are very valuable (especially those on the financial side, see his book on bail-ins or bail-outs). Still, I miss one very important part of the story. Greek competitiveness has eroded, and if it is not restored a partial default will stabilize the country, but set it on a downhill path, determined to repeat the experiences of 2001-2010. Imports outcompete Greek products, Greeks will try to move into debt (households, firms and the public sector) and if they succeed the resulting growth rate might look like Greece is on a sustainable growth path.

So, the adjustment on the monetary side (partial default) is just one side of the medal, the other being adjustment in competitiveness. There are different ways to bring this about. Lower wages would be an option, or more exotic “special tariffs” (in compliance with some future EU institution that can grant such measures, of course), or direct subsidies from the EU (unlikely), etc.

The divergence in competitiveness inside the euro zone has caused the financial crisis. If nothing is done about this problem, the EU will repeat its latest cycle of boom and bust. Of course, German exporters will resist any change to this “development strategy”, in conjunction with the financial sector, because both have profited much by the system of economic imbalances: it creates (unsustainable) potential for additional exports, and it creates more financial assets in order to pay for these exports.

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