Should Greece leave the euro to pursue a currency devaluation that could aid its economic recovery, as Argentina did in 2002? Many people have looked to my country for guidance on what Greece should do next. But to assess the options for Greece and for the eurozone, we must first acknowledge the political nature of the euro project and the need for any policy to be sustainable.
The single currency is a political and not an economic project. As an economic venture, it is a flawed proposition: the eurozone is not an optimal currency area and its members, with differing preferences and characteristics, require different interest and exchange rates over long periods. But the euro exists, and it embodies European integration, which is the centrepiece of postwar European politics.
Therefore, as with any other political project that is economically unviable, preserving the euro carries potentially large costs that should be borne by the political beneficiaries, particularly those that can afford it. German reunification was one such project: its estimated cost of €2tn was paid largely by Germany, but also by the rest of Europe, because of lower activity and higher interest rates. There is a price to be paid for the euro and it should be paid by strong European economies, mainly Germany. One can pretend that the euro is viable if all countries follow certain arbitrary rules (remember Maastricht) but the truth is that to rule out a “transfer union” is to condemn the project itself.
If we accept the need for transfers to preserve the euro, choosing a policy is more straightforward. First and foremost, Greece should not leave the euro. As Argentina found when it abandoned its peg to the dollar, the transitional costs are huge and the benefits uncertain. The Greek banking sector would be wiped out, while contract redenomination and “pesification” of flows and stocks would create chaos and intensify political uncertainty.
The comparison is of course imperfect: while Argentina recovered fast after devaluing and defaulting, it never abandoned its currency. More importantly, it closed the fiscal gap, maintaining budgetary discipline over several years. Argentina’s peg was also adopted unilaterally and so lacked external support. Greece is a full member of a multilateral project and is entitled to backing and relief to sustain that project. But is it realistic to expect support? It should be and not only because of European solidarity. Greece’s exit from the euro is bound to generate contagion throughout the eurozone and to raise the probability of a collapse, by proving Europe’s unwillingness to pay for its political endeavour.
Therefore, Greece should remain in the euro and seek three concessions. First, a relaxation of politically unsustainable austerity conditions; second, transfers to boost growth and competitiveness; and third, further debt relief.
Regarding competitiveness, in the absence of exchange rate adjustments, intra-union transfers should aim to reduce production costs. Given the political impossibility of further wage cuts, a temporary wage subsidy, partially financed by external sources, should be implemented until structural reforms increase productivity. These measures, together with public investments financed by the European Investment Bank, should improve competitiveness over a reasonable time period.
As to debt relief, Greece should postpone all servicing of debt with the official sector, to balance official creditors’ unjustified preferential treatment in the recent de facto default under the private sector involvement formula.
None of this should release Greece from its commitments to reform and adjust at a reasonable pace. However, austerity is politically more acceptable once a recovery has begun. In Argentina, fiscal deficits were eliminated only when growth was restored.
All this is desirable – but is it feasible? It all depends on political will. Germany may not be willing to subsidise, even temporarily, Greek labour. Greek politics could implode. Economically, the greatest danger lies in a contagious bank run. While in Greece this dynamic has not yet set in, banks have lost more deposits than Argentina did when it had to restrict withdrawals – the corralito that eventually brought down the government. Time is running short.
The euro could still be saved with meaningful burden sharing. All share the same aim. The Greeks want to remain in the eurozone, but are unwilling to do what it takes, since what it takes today is too much. The Germans want the euro to survive, but are reluctant to pay the price. If both compromised, the euro would have a better chance of survival.
The writer is a former governor of Argentina’s central bank