Krugman on Greece’s ‘Grexit’ from the euro

Greece is heading for a default on its debts as early as tomorrow, depending upon the IMF. The government has scheduled a referendum for Sunday for its citizens to vote on a new austerity plan that the government itself is recommending a “no” vote on.  This will likely result in Greece leaving the euro, and possibly undermine the euro currency union if other distressed countries decide to leave the euro currency union.

The New York Times‘ Paul Krugman writes, Greece Over the Brink:

krugman.pngIt has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits.

Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.

But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls — limits on the movement of funds out of the country. It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” — the institutions representing creditor interests — for yet more austerity.

Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.

To understand why I say this, you need to realize that most — not all, but most — of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 percent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.

So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.

And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.

So have I just made the case for “Grexit” — Greek exit from the euro? Not necessarily. The problem with Grexit has always been the risk of financial chaos, of a banking system disrupted by panicked withdrawals and of business hobbled both by banking troubles and by uncertainty over the legal status of debts. That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.

But the troika was having none of it. It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years.

This is, and presumably was intended to be, an offer Alexis Tsipras, the Greek prime minister, can’t accept, because it would destroy his political reason for being. The purpose must therefore be to drive him from office, which will probably happen if Greek voters fear confrontation with the troika enough to vote yes next week.

But they shouldn’t, for three reasons. First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.

Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence. Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.

So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.

2 responses to “Krugman on Greece’s ‘Grexit’ from the euro

  1. Doug Sanders

    Steve, your sad but funny experience with the Euros exchange reminds me of the stories about people thinking New Mexico is not a part of the U.S. American companies say they cannot ship there because it is a foreign country. Visitors from other states ask if they need a passport. People from New Mexico visiting other states are complimented on their ability to speak English so well. New Mexico magazine has three or four stories monthly about these misconceptions. It does not speak well for our education system.

  2. The European Union’s (the EU) setup of the Euro Monetary System has been fraught with problems since its inception. When Greece joined the EU in 2001, it agreed to use the Euro as it’s currency and to abide by a complex set of rules governing it’s use within the Greek economy. Almost immediately, Greece began violating the rules and the EU auditors looked the other way and ignored it. Most of the countries in the EU were also violating the rules, but the economies were booming and times were good. When the economy took a downturn, it caught several countried with their pants down, but their economies were strong enough they recovered from it and continued along. Not so for Greece. Now both sides are convinced they are correct and no one wants to budge. It will be interesting to see what happens when Greece withdraws from the EU with a significant amount of debt posted in Euros, and Greece wants to repay it with fiat script that has nothing to back it up.

    Speaking of euros…a couple of weeks ago, I found I had a couple of hundred Euros left over from my last trip to Europe. I decided to exchange them at my local Wells Fargo Bank. When I handed them to the teller and told her they were Euros from the EU, she looked at me like I had two heads. She had never heard of either, and she decided to go get her branch manager. I was surprised she didn’t recognize Euros, but I thought. “Okay, maybe she hasn’t had any need to know and wasn’t really interested.” She returned in a few minutes with the branch manager who was carrying a large soft bound book filled with pictures of current world currency. The manager, too, had never heard of Euros or the EU and acted as if I was trying to pass off Monopoly money as real. Her ignorance did surprise because she was wearing a University of Arizona ring, and I assume that – since she was working in a bank – her Major was in Business of some kind. In any event, I had to go through the book and show them where the Euros were to be found. Surprise! It was listed under the EU. Even after that, she insisted on calling some other office to verify that Euros were actually a genuine currency.

    I have never been a fan of the Euro. Since it’s inception, it seems to have had the effect of pushing prices up throughout Europe. I think it is because of the economic power of Germany and, to a lesser extent, France. Perhaps the combination of Greece leaving the EU and disrupting the Euro system, and the free and easy movement of terrorists around Europe, we will see the EU go away.