Thursday, July 16, 2015

The “Help for Exit” Club

I am launching today an informal “help for exit club” of commentators that come to the conclusion that a Grexit, however disorderly, is now preferable both for the Greek people first, and for other members of the European Union too, than a perpetual crisis, deepening depression and recurrent granting of “aid” to Greece that directly contributes to deteriorate the country’s Debt/GDP ratio. 

In previous posts (“Grexit: A European Solidarity Solution”, April 15, 2015, submitted to but rejected by Politico; and “A Plan of Hope for Greece”, June 29, 2015, rejected by Project Syndicate and Le Figaro) I suggested that it was high time to provide incentives to the Greek government for quitting the Eurozone, in order to regain competitiveness and return to growth. Such aid should materialize first as a massive debt relief (at least 50% but preferably 70 or 80 % of the current amount, which is heading “north” from the current 180 % to more than 210 % of GDP if the projected 86 billion euros of so-called “aid” are effectively transferred from the pocket of EU’s taxpayers to the government in Athens), but second and more importantly by a guarantee of continued access to ECB lending at low interest rates  for a period of five or six years, time necessary for structural adjustment after devaluation of the new Drachma.

The Eurozone could thus be saved from the Eichengreen fallacy according to which euro membership is a one-way street, or rather “impasse” (dead-end) I would say.  Exit is possible, and indeed necessary for several southern members, including France.


A first member of the club is Paul Krugman, who initially adopted the Eichengreen fallacy, but later recognized his mistake (“How Reversible Is The Euro?” New York Times, April 28, 2010).

“For a long time my view on the euro has been that it may well have been a mistake, but that bygones were bygones — it could not be undone. I was strongly influenced by the view expressed by Barry Eichengreen in a classic 2007 article (although I had heard that argument — maybe from Barry? — long before that piece was published): any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. So the idea of a euro breakup was a non-starter.

But now I’m reconsidering, for a simple reason: the Eichengreen argument is a reason not to plan on leaving the euro — but what if the bank runs and financial crisis happen anyway? In that case the marginal cost of leaving falls dramatically, and in fact the decision may effectively be taken out of policymakers’ hands.

Actually, Argentina’s departure from the convertibility law had some of that aspect. A deliberate decision to change the law would have triggered a banking crisis; but by 2001 a banking crisis was already in full swing, as were emergency restrictions on bank withdrawals. So the infeasible became feasible.”

Even the Financial Times ( "Greece should get debt relief in return for Grexit", Gideon Rachman, July 6, 2015), a core supporter of the euro system, has been joining the bandwagon and has endorsed my suggestion that European countries should give positive incentives for an exit to the Greek government, through major debt relief and guarantee of continued access to international finance, in order to ease the conditions of an inevitable Grexit. 

He is joined today by Justin Fox (“Leaving Euro Is Better Than Eternal Greek Crisis”, Bloomberg, July 15, 2015) who writes:

“ seems like Greece’s exit could provide political cover for the kind of mercy and aid from the rest of Europe that has been politically impossible up to now. There were hints of this in German Finance Minister Wolfgang Schaeuble’s proposal last week for a Greek “time out” from the Eurozone. Surely it would be better for Europe’s economic policy makers to send time figuring out how to manage an orderly Greek exit than continuing to negotiate deal after sure-to-fail deal to keep Greece in the euro.
A Greece that’s back on the drachma won’t be some kind of economic paradise. It will be small, struggling country without great prospects for growth. But that’s still better than being a country caught in a perpetual crisis, isn’t it?”.  

To be followed.

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