Posted by: Dirk | September 28, 2011

Ian Bremmer on Greece is just wrong

I have seen some good writing by Ian Bremmer, but his article in the FT today on Greece is quite misinformed. Here’s the core issue:

Worse, Greece has a mountain of debt denominated in euros. A switch to a new drachma would not change this. In fact, the drachma’s devaluation would only make the debt that remains that much harder to pay off.

Any limited competitive advantage gained by euro exit (and devaluation) would not hold for long. And that wouldn’t be the end of it. Post-exit, the rest of the eurozone and EU would punish Greece by imposing tariffs, while Greece would also lose EU structural funds.

That is wrong on two counts. One, exiting the euro would go together with a haircut on euro-denominated debt by the sovereign. Therefore, yes, the debt would be harder to pay off when Greece exits the euro, but no, that is not relevant, because this problem can and will be fixed by the stroke of the pen. And by the way, anybody who followed the financial news recently knows that such a hair cut is in the making. (Private sector debt can be solved by the private sector, but banks can be nationalized if their health is in danger as well.)

Now, the second point is that somehow it is assumed that some countries are good exporters and others are not. If Greece cannot attract firms by having low wages, why are we then hearing about jobs moving to low wage countries in other contexts?

Third, why wouldn’t a competitive boost by a devalued currency hold for long? After all, the euro was introduced to stop countries with relatively low productivity growth from devaluing. And if the currency is floating freely, why should investors flog towards Greek assets and so pull the exchange rate up again? Or, does he assume that net exports lead to a rise in the value of the new drachma? Then, success of the low exchange rate would have been self-defeating, but that would not be bad since net exports are what was supposed to happen in the first place.

And the idea that post-exit Greece would lose structural funds and face EU tariffs is just way off the mark. We talk about exit from the euro zone, not the European Union. This article seems like deliberate scare-mongering to me. Historically, many countries have abandoned fixed exchange rate regimes (Asia 97) or dollar(ized) regimes (Argentina), and these nations have not been erased from the map.


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