The euro is a straitjacket for Greece

30/6/2015

By Desmond Lachman

Editor’s note: The following is Desmond Lachman’s response to the New York Times Room for Debate question: Should Greece abandon the euro?

Albert Einstein famously remarked that a sure sign of insanity was to keep repeating exactly the same experiment and to expect a different result. Yet that is what the International Monetary Fund and the European Union have been doing with Greece over the past five years. It is also what they have continued to do in the latest round of loan negotiations. Greece would be well advised not to continue along the failed path of the past but rather to seek a new road that might offer reason for hope.

A principal cause of the Greek economic depression of the past six years, which is now on a scale of that of the United States in the 1930s, has been the pursuit of excessive budget austerity within a euro straitjacket. That straitjacket has denied Greece the ability to adjust its currency exchange rate to offset the harm of massive budget belt-tightening. The net result has been a 25 percent decline in the Greek economy and a rise in Greek unemployment to over 25 percent. It has also brought in its wake the fragmentation of Greek politics and the destruction of its middle class.

Undeterred by the disastrous results wrought by its past policy prescriptions, the I.M.F. and the European Union have persisted in asking of Greece further large scale budget cuts and painful structural reform. They do so without explaining why such policies, which have failed so miserably in the past, would now somehow lead to Greek economic growth.

Greece now has a clear choice. It can stick with the failed policies of the past that would almost certainly keep the Greek economy in a state of depression for many years to come and that would risk creating a failed Greek state. Alternately, it could abandon the euro and give itself the chance to promote economic growth that is so necessary to address its economy’s imbalances and to arrest its political rot.

This is not to suggest that opting for its own currency is without its risks and will not require careful economic management and far-reaching structural economic reform to modernize its economy. Rather, it is to say that if managed well and if supported by the I.M.F. and the international community, the introduction of its own currency would offer Greece the chance of resuming economic growth that has been denied it to date by being forced to address its economic imbalances with the euro.

If the I.M.F. and the European Union truly want Greece to succeed and not to become a failed state, they would do well to support an orderly Greek exit out of the euro.

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