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Economy Jun 17, 2011

Time for Greece to say goodbye to the euro: Mark Weisbrot

By Uttara Choudhury

Last year, the International Monetary Fund (IMF) and the European Union (EU) granted debt-ridden Greece $155 billion in bailout loans. Now Greece is reportedly going to get another multi-billion-euro bailout package to prevent it from defaulting on its debts and dragging the entire eurozone into another sovereign debt crisis.

But some economists feel it doesn't matter how many zeros you put on the end of a bad idea. It's still a bad idea. "This is a temporary quick-fix that will not solve Greece's huge unsustainable debt burden," said Mark Weisbrot, co-director of the Centre for Economic and Policy Research (CEPR) in Washington.

Weisbrot told Firstpost in New York that Greece shouldn't just "settle" for a deal with the IMF and EU as the austerity programmes wouldn't let it grow and make its way out of the recession. Loans that require pro-cyclical policies - cutting spending and raising taxes in the face of recession - should be off the table, he added.Excerpts from an interview:

Greeks don't like the spending cuts and tax hike proposals - and they're letting it be known. Yannis Behrakis / Reuters

In May last year, when the EU and IMF granted Greece $155 billion in bailout loans, the markets sighed in relief, but you had predicted that in three years Greece would be back in crisis. It already seems to be in all kinds of trouble. If the EU gives Greece new loans, will it be able to fend off a summer of default?

These are temporary quick-fixes and I don't think they will solve the underlying problem. Greece just has a huge unsustainable debt burden and it is even more unsustainable because of the conditions that the EU and the IMF are attaching to the lending which are shrinking the Greek economy: that actually increases the burden of the debt.

Some economists fear that a Greek default would trigger financial chaos like the September 2008 collapse of US investment bank Lehman Brothers. Does this Greek crisis have the potential to impact countries like India?

If you want my guess - and this is only a guess because people in high places can be stupid sometimes- I don't think the EU authorities are stupid enough to allow a full-blown financial crisis to come out of this. When push comes to shove, they will give Greece the money.

What about the European banks that have an enormous exposure to Greece?

There is always a chance of a disaster happening if these people are really stubborn. The European authorities are playing a game of brinkmanship or what we call a game of chicken. The principle of the game is that while each player prefers not to yield to the other, the worst possible outcome occurs when both players do not yield. They are trying to force Greece to accept these terms by pretending that they aren't going to give them the money. But my guess is that the EU will pay - as it is a small amount of money compared to what the European banks can lose if there is a messy Greek default.

Mark Weisbrot reckons EU authorities "aren't stupid enough" to allow a full-blown crisis to come about. Image courtesy: CEPR

Prime Minister George Papandreou is struggling to get support for a package of $39.5 billion in spending cuts and tax hikes demanded by the EU and the IMF in exchange for the bailout loans they gave Greece last year. Do the thousands of Greeks in the streets have it right, and the EU economists wrong because you can't shrink your way out of recession; you have to grow your way out?

Yes, I think this is a case when the people are definitely right. Their government is wrong for going along with a programme that is self-destructive. From a creditors' point of view, which the EU authorities have adopted, a country that has accumulated too much debt must be punished, so as not to encourage "bad behaviour." They don't want to set a precedent because, then Ireland, Portugal and Spain will want softer terms. They are using Greece as an example but it is wrong. Punishing an entire country for the past mistakes of some of its leaders, while satisfying to some, is hardly the basis for sound policy.

It is not fair to the Greek people. It would be different if the austerity measures would somehow makes things better but this is not the case. It will be ten years before they reach their pre-recession level of output. It is ridiculous.

In other words, the Greek people will go through a lot of suffering, their economy will shrink and the debt burden will grow, and then they will very likely face the same choice of debt rescheduling, restructuring or default and/or leaving the euro. You can be sure the European authorities will offer Greece a better deal if it threatens to leave the eurozone.

Since the EU/IMF is not offering Greece a growth option, will it be better off leaving the euro and renegotiating its debt?

Yes, I think so. Greece would be better off doing that than committing to years of recession and economic stagnation. Of course, there are costs to that route as well, and Greece would have to try to minimise those by organising an orderly transition, preventing the failures of national banks and business as much as possible, rearranging loans and mortgages that involve international borrowing in euros. But Argentina managed such a transition in 2002, under much more adverse initial circumstances, and with no help from outside.

The Argentines first took loans from the IMF, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened from mid-1998 to the end of 2001, pushing half the country into poverty. Argentina then defaulted on its foreign debt and cut loose from the dollar.

The economy shrank for just one more quarter after the devaluation and default; it then grew 63% over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty.

I'm not saying such a decision should be made lightly. But if the EU offers nothing but open-ended recession, and a recovery that does not offer Greece the opportunity to reach their pre-crisis GDP for 8 or 9 years - as current projections indicate - or possibly worse, then the option of leaving the euro could be the better choice. The attempt to shrink Greece's way out has failed. If that's all that the EU has to offer, then it is time for Greece, and perhaps others, to say goodbye to the euro.


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