The Guardian Unlimited, May 13, 2011
See article on original website
Paul Krugman responds to my op-ed earlier this week on Greece and the eurozone with agreement and disagreement. He agrees that “Argentina is the right parallel” for the Greek situation, and that “the program for Greece is not working; it’s not even close to working.” But he disagrees on exiting the Euro, for two reasons:
(1) Argentina “still had peso notes in circulation, so the mechanics of exit from the peg were much easier than exiting the euro would be.”
(2) “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.”
These are good points, and I think reasonable people can disagree on whether Greece should consider leaving the Euro; there are a number of risks and uncertainties with that path as well as the current path.
Before addressing these points I should clarify that although the headline assigned to my article said “Why Greece Should Reject the Euro,” I did not argue that Greece should simply exit from the Euro. My argument was that this has to be on the table, and that if the European authorities continue to offer Greece only punishment, rather than help, then the Greek government – as well as others – should be prepared to leave.
This first point about the difference between Greece and Argentina, in terms of Greece having already given up its currency, is very true. This does complicate matters. Greece would have to re-introduce its currency, something that Argentina did not have to do. However, Argentina did suffer a serious financial collapse, even with its own currency. In the fall of 2002, with the recovery already underway, the International Monetary Fund (IMF) projected just 1 percent growth for 2003. Actual growth turned out to be 8.8 percent.
And it faced other very tough challenges that Greece might not. For example, for nearly two years after the default, the IMF was pressing Argentina to adopt policies that would have inhibited its recovery and refusing to roll over its debt unless the Argentines signed an agreement. At the time, only a handful of failed states (such as Iraq and Congo) had ever defaulted to the IMF. The Fund was believed to have the ability to cut off private trade credits to a defaulting country, so that it would not be able to obtain the necessary credits to even carry on normal trade. This was the threat under which the Argentine government had to decide what to do in 2003. Many people assumed that it was too much to stand up to.
At the time, I argued that while the Fund might have the ability to inflict this “ultimate punishment,” that it would not, as a political matter, be able to do so – in the same way that Nixon could not use nuclear weapons in Vietnam. Argentina and the IMF came to a showdown in September of 2003, and Argentina temporarily defaulted to the IMF. The Fund backed down and rolled over the loans.
I think that are even more limits to what the European authorities can do to punish Greece today, without the consent of its government. In fact, I would argue that the European authorities – the European Commission, the European Central Bank (ECB), and the IMF – are only getting away with the punishment to which they are currently subjecting Greece is because of a false narrative that prevails. The narrative is that Greece has no choice but to cut spending, privatize, and enact other “reforms” because it is “broke.” In this narrative, the European authorities are helping Greece, forcing the country to take the necessary “tough medicine” and restore its solvency, so the economy can grow again. There are even many Greeks who believe this, and many journalists. (Krugman, of course, does not accept any of this.)
The Greek government (as well as those of Portugal, Ireland, and Spain) needs to shift this narrative toward the truth. One way to do this in practice is to confront the punishers. That is what the Argentine government did, and that is one reason it had popular support to take the big risks that it did, and ultimately to succeed. The more accurate narrative today is that Greece is bargaining with creditors, as well as the European authorities, who are pursuing their own interests in opposition to the interests and well-being of the vast majority of Greeks. They have over a trillion dollars at their disposal and could easily “bail out” Greece with interest-free loans, and even a real (not Jamaican-style, as is currently being discussed) debt restructuring, that would allow for counter-cyclical fiscal policy and growth. But they have opted to punish Greece – for various reasons, including the creditors’ own interests in punishment, their ideology, imaginary fears of inflation, and to prevent other countries from also demanding a “growth option.” They are sticking to this route even if it means an indefinite recession, and to force 50 billion Euros of privatizations that will very likely enrich some Europeans at the expense of Greek taxpayers.
In other ways Greece is better situated than Argentina was when it defaulted. Most importantly, Greece is a much more developed country: its income per person, at $28,400 (purchasing power parity dollars) is nearly three times (in real terms) that of Argentina in 2001. A financial crisis does not so easily cause long-term damage to a developed economy; the damage is more likely caused by years of bad policy in response to it, as we are now witnessing in the eurozone periphery (and “deficit hawks” are attempting in the United States).
As for the advantages of the European project, I would argue that these must be separated from the monetary union. The monetary union is a right-wing project; ECB makes Ben Bernanke, a Republican, look like a socialist by comparison. It is a major impediment to social progress in the eurozone countries, and will likely remain so for the foreseeable future. And then there are all the economic reasons – mainly having to do with the difficulties of having countries with different productivity levels and growth paths share a common currency – why the currency union was not such a great idea to begin with. So Greece would probably gain more than it loses by getting out of the Euro, in terms of its own long-run development.
A default and exit from the Euro could possibly cause as much trouble for Germany and France as for Greece, given their holdings of Greek debt and the effect on European banks generally. So that is why I would argue that Greece needs to put these options on the table; default and exit are its big bargaining chips. Without them, the European authorities could squeeze Greece indefinitely, causing irreparable harm to the economy and subjecting millions of people to unnecessary unemployment.
A Greek threat to exit the euro could cause a rethinking in Portugal, Ireland, and Spain, where they are suffering hundreds of billions of euros worth of lost output due to bad macroeconomic policy. Whether or not these countries decide to rethink the euro itself, simply reconsidering – in all of Europe – the right-wing economic policies of the eurozone authorities would be a big step forward for the region.