Bloomberg: What Things Might Be Like If Greece Had Never Joined the Euro

19/6/2015

The carnage has been massive

By Tom Keene

The International Monetary Fund’s chief economist, Olivier Blanchard, recently asked a simple and important question: “How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?” But that raises two more questions: How much of an adjustment has Greece already made? And have its creditors given anything at all? - James K. Galbraith, Project Syndicate

What if?

What if there had never been a euro? What if the request for a unifying currency had not occurred in 1929 within the League of Nations debate? What if Jacques Delors had not done his heavy lifting, one part of the path to the euro replacing the European Currency Unit in December 1995. What if …

What if Greece had not joined the party?

For a beleaguered Greece, it’s a profound question. With all that has gone wrong, there’s that nagging reality that a Greece with its own currency would have seen a devaluation that would’ve assisted Greek exports, even with offsetting wealth destruction.

I had to do some fractured math to come up with DEM-GRD, the number of Greek drachma as compared with the deutsche mark. Take GRD/USD times (1/DEM/USD). So it becomes GRD/USD times USD/DEM. The USDs cancel out. There will be a quiz on Santorini, the Tango Bar, July 10.

The chart is plotted semi-log, so slope matters. The slope of Greece’s depreciation to Germany is ugly from 1981 to 1986, less ugly but elegantly persistent from about 1986 to 1996, and then billiard-table flatness from near the advent of the euro, 1999 to the present. What if that had never happened? If we can assume further trend depreciation, one path is shown: massive drachma weakness. But there can be countless other less dramatic paths below and, even worse, above the red-arrowed extrapolation.

Obviously an independent, freestanding drachma would have import and export implications for Greece, and to a lesser extent Germany. Less obvious is the profound impact on the real Greek economy.

Let’s consider reality: Since the rough advent of the euro, in 1999, through 2013, Greek per capita real GDP is up less than 1 percent. The German equivalent is up 19.4 percent. And of course, there is further carnage in 2014 and 2015. The 1981 inflation-adjusted, per-person GDP difference between Germany and Greece was $8,102; in 2013 it was $20,976.

Greek unemployment has doubled in 1999-2015, from 11.4 percent to 25.6 percent; in Germany, from 8.8 percent to a jaw-dropping 4.7 percent.

Back to the present: To jump-start your weekend reading on our collective Greek Drama, start with James K. Galbraith’s primal scream in Project Syndicate. The good liberal goes after the IMF but, critically, ends with a common plea for restructuring. Then read Barry Ritholtz, who somehow gets from Athens to King’s Landing.

Discuss.

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