The Lure Of Grexit - Debunked!

An author by the name of Leonidas Stergiou published an analysis in the Ekathimerini under the title "Why depreciation is the wrong medicine for the Greek economy". It is, for once, an objective discussion of the pro's and con's of a Grexit for the Greek economy. Stergiou takes issue with the premise voiced often by FM Schäuble: Greece should return to the Drachma, adjust its economy and when a new equilibrium is reached, Greece could return to the Euro. Schäuble's argument is that an adjustment of the Greek economy cannot be avoided and, given that, it would be far less painful to make that adjustment with the Drachma as currency instead of the Euro.

Leonidas Stergiou says that Schäuble is wrong, and he makes very good points to support his argument. His key point is:

"Harsh reality together with economics teach that the devaluation of a currency may help, provided that the country does not import more than it exports, and mainly that it does not import a lot of raw materials or intermediate materials that have to be processed. A country with such issues that proceeds with depreciation will be plagued by inflation. ... So in a country with a negative trade balance that imports a lot of raw materials, depreciation raises production costs and creates inflation. The raised production costs annul part of the competitiveness that was achieved by the depreciation. Should the inflation be transferred to salaries, then all the gains from the depreciation will be lost because, in the end, nothing became cheaper."

So for all those who would be hoping that a return to the Drachma would make their lives more comfortable, Stergiou serves a grand disillusionment:

"In other words the measures mandated by the memorandum would be inevitable and would have to be implemented strictly – but without the funding that came with the memorandum. In any case, right now there is internal devaluation taking place within the eurozone. If Greece did not have the euro, a tough economic adjustment program through austerity measures would still be necessary. Otherwise, the inflation due to depreciation would offset the benefits of the competitiveness after the depreciation. Now, Greece in the euro area cannot depreciate its currency in order to make its products and services more competitive. But it could directly reduce the prices of all components of the domestic GDP. To put it simply, if you cannot increase the purchasing power of others, you must decrease your own."

And Stergiou concludes with a condemnation of the Greek government (or rather: all Greek governments since the crisis broke out):

"Greek governments have preferred to accept austerity measures particularly through tax increases and reductions in pensions and wages rather than proceeding to reforms and speeding up the implementation of the MoUs. Instead of this, they entered into long-term and overnight negotiations with the troika in an attempt to postpone the political cost of the reforms for later. Thus, the recession period was prolonged, the debt increased, the financing needs remained unmet. This tactic leads to new MoUs and the prolonging of the recession period and increases the the chances of spiraling into recession and default. On the other hand, without a new MoU, a default can be considered a certain outcome."