Financial Times: ‘Return to Drachma Could Lead to Successful Recovery’

 A new Financial Times article brings a fresh idea to the table. Under the title “Greece’s exit may become the euro’s envy,” writer Arvind Subramanian expresses a radical view, saying that despite the initial destructive effects of the default, the Greek development with the old Drachma could prove much more effective than austerity and bailout programs. He seems convinced that the ominous rumors are proof of the EU powers fear, that a Greek default could make Greece even more dangerous by enhancing its economic prosperity. That would show the other member-states, which suffer from the crisis the easy way, wouldn’t profit either the EU nor the IMF.

“Default will be disastrous for Greece and the resulting contagion would be damaging for Europe. So goes the conventional wisdom. The only debate has been about the strength of contagion and the appropriate response of vulnerable countries and of the check-writing country. Might the debate be misguided because the premise is flawed? Expelled from the eurozone, Greece might prove more dangerous to the system than it ever was inside it – by providing a model of successful recovery,” explains the Financial Times article.

And he goes on. “There is an overlooked scenario in which default is not a disaster for Greece. If this is the case, the real, more existential threat to the eurozone might be a very different one, in which the Greeks have the last laugh,” calling everyone to consider this radical scenario.

Admitting that the initial consequences will be harsh, he explains that “this process would also produce a substantially depreciated exchange rate (50 drachmas to the euro, anyone?). And that would set in motion a process of adjustment that would soon re-orientate the economy and put it on a path of sustainable growth. In fact, Greek growth would probably surge, possibly for a prolonged period, if it adopted sensible policies to restore rapidly and sustain macroeconomic stability.”

The writer substantiates his skepticism. “Just look at what happened to the countries that defaulted and devalued during the financial crises of the 1990s. They all initially suffered severe contractions. But the recessions lasted only one or two years. Then came the rebound. South Korea posted nine years of growth averaging nearly 6 percent. Indonesia, which experienced a wave of defaults that toppled nearly every bank in the entire system, registered growth above 5 percent for a similar period; Argentina close to 8 percent; and Russia above 7 percent. The historical record shows clearly that there is life after financial crises.”

“This would also be true in Greece, even allowing for the particularities of its situation,” Arvind says.

“Greece, moreover, would experience a mega-depreciation, like the countries mentioned above, not a modest one. Such a change would necessarily create new opportunities for exports and convert marginally non-tradable activities into tradable ones…the strong incentives that will be created by a super-competitive exchange rate are undeniable,” he adds.

The writer is a senior fellow at the Peterson Institute for International Economics and author of ‘Eclipse: Living in the Shadow of China’s Economic Dominance.’

Source: www.ft.com