What can one add to the Grexit discussion? Little to none, it seems, given the numerous and varying comments of experts and opinion leaders on the possible exit of Greece from the Eurozone. Well, there may be one thing. A Grexit will imply serious economic damage, to Greece and to other countries, but will also have benefits. Not so many that we should welcome a Grexit, but sufficiently so to question the thinking that a Grexit may be the end of the world or the EU or the euro.
A Grexit will imply serious economic damage, to Greece and to other countries, but will also have benefits
What are the benefits of a Grexit? I will list five of them, not meaning to be exhaustive, but to focus on some of the important elements that sometimes seem to have been forgotten.
Actually, the first benefit seems to be forgotten by only a few. The country that leaves the union enhances its set of policy instruments. In the case of Greece, the reintroduction of a low-valued drachma helps Greece improve its competitive position, thereby fostering economic growth in Greece by increasing exports and reducing imports.
The second benefit is related, but not the same. That is that Greece can start pursuing its own monetary policies. Now, the argument is not that Greece can tailor monetary policies to its own economic needs (the previous argument). Rather, now the argument is that Greece can free itself from the very expansionary monetary policies that characterize the euro area. These ultra-low interest rate monetary policies not only contribute to the perspective of high inflation, bubbles on financial markets and financial instability, but also induce Eurozone countries to adopt lax budgetary policies. The latter applies to all countries in the Eurozone, but is especially important for highly indebted countries like Greece. Upon a Grexit, Greece will have to seek finance on the global capital market rather than in Brussels. Obviously, this will be costly, especially in the short run. But it is also true that Greece may benefit from the global capital market imposing much more discipline upon Greece than the EMU has ever done.
Greece may benefit from the global capital market imposing much more discipline upon Greece than the EMU has ever done
The third benefit is well-known in academic circles. A write-down on Greek debts represents a serious loss to borrowing countries and jeopardizes the banking system in the EU. The counterpart is that Greece will gain from debt relief. Not only directly, to the amount of the debt reduction, but also indirectly, through the drag on economic growth from a debt overhang. Currently, Greece wins not so much from higher economic growth as it needs to use any additional output to pay back borrowing countries. Upon a substantial debt relief, Greece will have a bigger incentive to reform policies in order to increase economic growth. No doubt Greece will benefit from higher growth, but also borrowing countries who will experience smaller losses on remaining loans.
An additional benefit is the discipline imposed on other Eurozone countries that succeeded to improve their fiscal policies in recent years. Think what would be the likely effect upon countries like Portugal and Ireland if Greece would succeed getting attractive lending without adequately reforming its economic policies? Such negative spill over effects on other countries would be a big challenge to the monetary union as they would affect all Eurozone countries to a certain extent.
‘you can check out any time you like, but you can never leave’
An argument seldom heard is related to the ‘Hotel California’ feature of the EMU: ‘you can check out any time you like, but you can never leave’. For many politicians, this is a powerful argument to try to avoid a Grexit at all cost. However, economically, a Grexit could trigger reforms that strengthen EU institutions. If the EMU, from the start, had had clear rules to guide the exit from member countries, the Greek crisis would currently not have taken so much time from EU (and other) officials whom we expect to work on other important problems as well.
At the moment, I cannot tell whether we will have a Grexit in the near future. I can tell you it will not be the end of the world.