3 Questions: David Singer on the Greek Euro-tragedy

Political scientist David Singer explains why Greece seemingly can’t live with the Euro, and can’t live without it.


The economic and fiscal woes of Greece remain at the center of European politics. In recent months, a variety of economists and commentators have asked if Greece should consider the unprecedented move of leaving the European Currency Union, so that it could control and lower its own currency rate, in order to spur exports and growth at a time when its economy is struggling badly. David Singer, an associate professor of political science at MIT, studies international finance and the politics of national currencies. He discussed Greece and the Euro-mess with MIT News.

Q. There has been increased talk of Greece leaving the Euro. What are the basic pros and cons of Greece using the Euro as its currency?

A. Greece, like all the countries in the Eurozone, faces important trade-offs as a result of adopting the Euro. Over the past decade, it has benefited from increased trade and investment and lower borrowing costs. On the other hand, in times of economic distress, the country must adjust its own economy, rather than simply lowering the value of the currency, to pull itself out of trouble.

The European Central Bank (ECB), which controls monetary policy for the entire Eurozone, can also make adjustments by altering interest rates and influencing the value of the currency. But the ECB cannot target adjustments for particular countries. It necessarily implements a one-size-fits-all policy. Unfortunately for Greece, the ECB’s decisions have been driven by the large economies at the core of Europe, including Germany and France, which are more concerned about warding off potential inflation than having the smaller countries climb out of recession.

Q. What effect would staying with the Euro have on Greece?  

A. If Greece remains in the Eurozone, it must adjust its domestic economy by severely cutting wages and government spending. To put it mildly, such cuts are not politically popular. In the medium term, Greece would have to play Odysseus and tie itself to the mast, resisting popular pressures for greater borrowing, more generous pensions and higher wages. Many analysts believe that Greece simply cannot commit itself to acting prudently in the future. One stumbling block is moral hazard: If Greece believes that Europe and the International Monetary Fund will come to its rescue, it has little incentive to commit to austere policies in the medium term.

Q. Then why not leave the Euro? Why shouldn’t Greece return to its own currency as a way of spurring economic growth?

A. To return to the parable of the Odyssey, if remaining in the Eurozone is the Scylla, exiting the Eurozone is the Charybdis. If Greece were to drop the Euro and re-adopt its own currency, the value of that currency would immediately plummet — some experts say by more than 50 percent. That could be helpful in the medium term because a weaker currency stimulates exports, but it would be disastrous in the short term. The Greeks owe a lot of money, and much of that debt is denominated in Euros. If the new Greek currency were to plummet, the real value of that already enormous debt would explode. The weaker currency would also cause significant inflation, which would further erode the purchasing power of Greek workers already suffering from wage and pension cuts.

The pain of a Greek exit from the Eurozone would also be felt by countries in the core of Europe. Banks in Germany, France, the Netherlands and other countries hold a substantial amount of Greek debt, and they could find themselves in a crisis of their own if Greece is unable to pay. Moreover, a Greek exit could raise the prospect of additional departures and thereby cause a debilitating speculative attack on the Euro.

Another obstacle is a political one: There is no exit provision in the international agreements that constitute the Eurozone. If Greece were to drop the Euro, it is not clear whether it would also have to leave the European Union.

Because Greece’s economic problems are ultimately Europe’s economic problems, my hunch is that the Europeans will do everything in their power to hold the Eurozone together, even if that means additional bailouts for the troubled countries in southern Europe.
 


Topics: 3 Questions, Euro, Finance, Greece, Global, Political science

Comments

Good article, though it has its problems, stemming from the fact that the author hasn't -probably- visited Greece the past days. Most Greeks do not believe that IMF or the Eurozone will 'save' their country, actually the contrary; especially for the IMF, they regard it as a plague, whose sole purpose is to destroy, morally and financially the middle class. Most Greeks believe that the huge debt was not their wrongdoing, they did not benefit -enough-from its accumulation, so they shouldn't be burdened by it. I know that may sound unreasonable but, well, reason has left my country LONG ago. Furthermore, in my opinion, the part where the benefits of exiting the Euro are described does not account for the following: Greece produces virtually nothing. Exports will not benefit, simply because Greece does not have products to export, such as manufacturing equipment, textiles, agriculture...Nothing.
Same scenario happened for the past 6 months ago, but the ECB injects money through bail out systems, If it's done by second time then what will happen in next trading market, Likewise on 2010 German banned the nuked selling of govt bonds, Its critical issue until the government takes necessary action. Its not only for Greece, Its a Global problem.
The theory you presented in this interview is quite wrong,acording to me,because I believe that the constant "cuts" will only make Greeks suffer and destroy their country.To begin with,the increasing taxes(from 19 to 21 and then to 23 % in 4 months)in combination with the dicrease of the wages has absolutely no result.This current policy,will not give any results and will depress the economic growth.If Greece goes down,it will bear down Europe,China and a part of America(mostly banks). Another fact is that after the Second World War, Germany owes a huge amount of money to Greece as a compensation for the crimes they commited(approximately 75 billion euros). Those money were never given to Greece although all the other countries received what they deserved.Germany has never mentioned that.What's more,Greece is not allowed to use the amount of oil which is located in a large volume underneath the Aegean sea. A solution that Greece could adopt is widen its market towards the Arabian markets. Greece can also export many of its products,which are unique in the world and hard to find(mostly agricultural products). The IMF's interference is destructive and useless because of the huge interest.If Greece will ever come out of the memorandum,it's debt will have become enormous and will be NEVER repayed.
There is nothing inherent to defaulting that necessarily makes it a catastrophe. If the creditors think their interests have been given due consideration and that they are getting the best possible deal given the realities of the situation, then they will grumble but go along. Default will only be a disaster if creditors interpret it to mean that the world is out to screw them. This outcome can be avoided and probably will be.
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