Sunday, May 20, 2012

Roubini Is Right, As Usual …

“Greece must exit”, he writes for Project Syndicate (May 17). Of course it has to, for the welfare of the Greeks themselves. Politicians and commentators, meanwhile, keep obfuscating the issue and develop at length new denials of reality in the media, ad nauseam, even though everything that was labeled "impossible" yesterday becomes day after day the new topic of economic policy. Remember the time, a few months ago, when “more integrated European governance” was supposed to solve all the “PIIGS” problems? Remember the Eurobonds fantasy? Remember the Eichengreen fallacy that once a country entered the euro it was “forever”?

For someone who predicted long ago the present slow motion train wreck of the eurozone, further comments on the present evolution seems superfluous and indeed rather boring. Of course, Greece will default again and exit from the euro, and there will be no apocalypse, because on the one hand default diminish the burden of foreign debt, and on the other hand a massive depreciation of the new drachma in international currency markets will restore Greek competitiveness, especially in regard to the very important tourism industry (about 18 percent of Greek GDP), while discouraging imports that compete against local products and services.

Have a look at Roubini’s punch line:

“The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth. As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.

Like a doomed marriage, it is better to have rules for the inevitable divorce that make separation less costly to both sides. Make no mistake: an orderly euro exit by Greece implies significant economic pain. But watching the slow, disorderly implosion of the Greek economy and society would be much worse.”

Quite right.

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