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Tuesday, February 21, 2012

On the advantages of being competitive

In an interview with Der Spiegel, Prof. Sinn - a staunch advocate of a Greek Euro-exit - said the following:

"After returning to the Drachma, Greece would again be competitive. Greek products would suddenly be cheaper again (than imported products) and that would drive demand away from imports and towards domestic products. Greeks would no longer buy tomatoes and olive oil from Holland and Italy but, instead, from their own farmers".

Here is the key message put in very simple terms, so simple that even a high school student would understand it.

I would only add the following: Greece doesn't have to leave the Eurozone to achieve the above effects. Greece could hold on to the Euro but simulate a situation as though she had returned to the Drachma.

The first step would be to implement special taxes on these imports, thereby making them more expensive. Greeks would no longer buy imports but buy local products instead. This, however would only be a benefit for the Greek producer because he can now sell much more than before at good prices. The consumer suffers because he now has to pay higher prices for those goods.

Thus, the above first step would have to be accompanied by a second measure: the Greek producer must be given a clear time frame within which he has to be able to produce at internationally competitive prices, or else lose all protection right away.

Prof. Sinn argues that a Euro-exit is the only way for Greece to regain competitiveness. I agree that it would certainly be the most effective way. I still argue, though, that there are other ways as well (such as the above) even though none would be as simple as a Euro-exit. My point is, however, that a Euro-exit would have phenomenal collateral damage for Greece and Greeks, and one would be wise to explore all alternatives how this collateral damage could be avoided before jumping the gun on a Euro-exit.

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