The « Help for Exit » Club: Welcome to Brad DeLong

In a Project Syndicate column (“Depression’s Advocates”, July 24), Brad DeLong (University of California at Berkeley) contrasts the cost to Greece of not exiting the Eurozone with the counterfactual of Iceland’s management of the 2008 financial crisis and subsequent return to prosperity.

“When the Greek debt crisis erupted in 2010, it seemed to me that the lessons of history were so obvious that the path to a resolution would be straightforward. The logic was clear. Had Greece not been a member of the eurozone, its best option would have been to default, restructure its debt, and depreciate its currency. But, because the European Union did not want Greece to exit the eurozone (which would have been a major setback for Europe as a political project), Greece would be offered enough aid, support, debt forgiveness, and assistance with payments to offset any advantages it might gain by exiting the monetary union.

Instead, Greece’s creditors chose to tighten the screws. As a result, Greece is likely much worse off today than it would have been had it abandoned the euro in 2010.”

Indeed, Iceland that did default, managed a substantial currency depreciation and restructured its debt after being hit by the 2008 financial crisis, has since recovered and returned to growth, while Greece’s GDP is now 25% below it 2009 level with no recovery in view.

DeLong goes on quoting Eichengreen’s argument that “technical considerations make exiting the Eurozone difficult, expensive, and dangerous”. But, he adds, “that is just one side of the ledger” mentioning “the cost to Greece of not exiting the Eurozone” and concludes that “it seems improbable that the immediate impact of exiting the Eurozone today would be larger than the long-run costs of remaining, given the insistence of Greece’s creditors on austerity.”

Let’s add that it was also obvious, from the start, that Greece did not belong to a same Optimal Currency Area as Germany and that a deflationary policy without a major currency depreciation had strictly no chance whatsoever to return the economy to a growth path, making the Eichengreen’s diagnosis of an “impossible exit” strangely misguided.

The rising cost to Greece of its “non exit” paves the way for one more episode of financial and political crisis in the short run and should invite the Eurogroup  creditors to reverse their “euro-and-austerity” policy to one of “help-for-exit”.