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Trapped by the Euro, Yet Dependent on It

Tuesday, 24 May 2011 04:42 By Paul Krugman, Truthout | Report
Trapped by the Euro Yet Dependent on It

(Image: CartoonArts International  /  The New York Times Syndicate)

Kudos to Mark Weisbrot, co-director of the Center for Economic and Policy Research, for saying the unsayable, and making a case for a Greek exit from the euro.

In a New York Times Op-Ed published on May 10, he wrote: “The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. …

“Then Argentina 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 percent over the next six years.

“The main reason for Argentina’s rapid recovery was that it was finally freed from adhering to fiscal and monetary policies that stifled growth. The same would be true for Greece if it were to drop the euro.”

I agree with a lot of what he says, but am still not ready to counsel that step, for a couple of reasons. First, while I agree that Argentina is the right parallel, it’s an imperfect parallel: although Argentina had a supposedly irreversible peg to the dollar, it still had peso notes in circulation, so the mechanics of exit from the peg were much easier than exiting the euro would be. And the mechanics matter a lot; they could make all the difference between a brief period of shock and an extended financial breakdown.

Second, Greece, as a relatively poor country with a history of shaky governance, has a lot to gain from being a citizen in good standing of the European project — concrete things like aid from cohesion funds, hard-to-quantify but probably important things like the stabilizing effect, economically and politically, of being part of a grand democratic alliance.

A euro exit could do much more damage to Greece in the long run than Argentina faced from its devaluation.

That said, Mr. Weisbrot is right in saying that Europe’s program for Greece is not working; it’s not even close to working. At the very least there must be a debt restructuring that actually reduces the debt burden rather than simply stretching it out. And the longer this situation remains unresolved, the less hope I have that Greece will be able to stay with the euro, even if it wants to.

Greek Out

An Argentine commenter notes that Argentina, in addition to letting the peso drop, both defaulted on its debt and imposed temporary restrictions on bank withdrawals. Indeed. Something similar would have to happen for a Greek exit from the euro to take place.

But bear in mind that the first piece is already a foregone conclusion: everyone knows that Greece won’t repay its debt in full. The problem is that even if the country defaults on its debt, it still faces the problem of wages and prices way out of line with the core euro countries. So devaluation is what you do when default isn’t enough.

As for the second point, the main argument against the possibility of a euro breakup has been precisely that any hint of exit would unleash the mother of all bank runs. So how could exit take place? I argued some time ago that it would have to happen in the context of a banking crisis that forces a temporary closure of the banks — something along the lines of the Argentine corralito.

This is why I find it hard to imagine any European government making a solemn, deliberate decision to leave the euro. But I can easily see how events could lead to a situation in which euro exit becomes the least bad option.

Truthout has licensed this content. It may not be reproduced by any other source and is not covered by our Creative Commons license.

Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007). Copyright 2011 The New York Times.


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Trapped by the Euro, Yet Dependent on It

Tuesday, 24 May 2011 04:42 By Paul Krugman, Truthout | Report
Trapped by the Euro Yet Dependent on It

(Image: CartoonArts International  /  The New York Times Syndicate)

Kudos to Mark Weisbrot, co-director of the Center for Economic and Policy Research, for saying the unsayable, and making a case for a Greek exit from the euro.

In a New York Times Op-Ed published on May 10, he wrote: “The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. …

“Then Argentina 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 percent over the next six years.

“The main reason for Argentina’s rapid recovery was that it was finally freed from adhering to fiscal and monetary policies that stifled growth. The same would be true for Greece if it were to drop the euro.”

I agree with a lot of what he says, but am still not ready to counsel that step, for a couple of reasons. First, while I agree that Argentina is the right parallel, it’s an imperfect parallel: although Argentina had a supposedly irreversible peg to the dollar, it still had peso notes in circulation, so the mechanics of exit from the peg were much easier than exiting the euro would be. And the mechanics matter a lot; they could make all the difference between a brief period of shock and an extended financial breakdown.

Second, Greece, as a relatively poor country with a history of shaky governance, has a lot to gain from being a citizen in good standing of the European project — concrete things like aid from cohesion funds, hard-to-quantify but probably important things like the stabilizing effect, economically and politically, of being part of a grand democratic alliance.

A euro exit could do much more damage to Greece in the long run than Argentina faced from its devaluation.

That said, Mr. Weisbrot is right in saying that Europe’s program for Greece is not working; it’s not even close to working. At the very least there must be a debt restructuring that actually reduces the debt burden rather than simply stretching it out. And the longer this situation remains unresolved, the less hope I have that Greece will be able to stay with the euro, even if it wants to.

Greek Out

An Argentine commenter notes that Argentina, in addition to letting the peso drop, both defaulted on its debt and imposed temporary restrictions on bank withdrawals. Indeed. Something similar would have to happen for a Greek exit from the euro to take place.

But bear in mind that the first piece is already a foregone conclusion: everyone knows that Greece won’t repay its debt in full. The problem is that even if the country defaults on its debt, it still faces the problem of wages and prices way out of line with the core euro countries. So devaluation is what you do when default isn’t enough.

As for the second point, the main argument against the possibility of a euro breakup has been precisely that any hint of exit would unleash the mother of all bank runs. So how could exit take place? I argued some time ago that it would have to happen in the context of a banking crisis that forces a temporary closure of the banks — something along the lines of the Argentine corralito.

This is why I find it hard to imagine any European government making a solemn, deliberate decision to leave the euro. But I can easily see how events could lead to a situation in which euro exit becomes the least bad option.

Truthout has licensed this content. It may not be reproduced by any other source and is not covered by our Creative Commons license.

Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007). Copyright 2011 The New York Times.


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