Policymakers working on the Greek debt crisis have begun to discuss the ramifications of a departure of Greece from the euro zone, a move once considered unthinkable.
Reuters reported that the idea had been dismissed when Greece’s troubles assumed prominence last year, but now has become a consideration as officials try to anticipate what the fallout could be from such an action.
Reuters cited an assessment of the situation written by a euro zone official who had worked on Greece’s rescue packages and who will be leaving Brussels after a number of years. In the report, the official was quoted speculating on the 17-member makeup of the euro zone, saying, “There may well still be 17 members, but whether it will be the same 17 members is an open question.”
According to the report, other Brussels-based officials not belonging to the euro zone, such as Britain, Sweden and the U.S., often speculate these days on the possibility of a Greek exit from the group and also express their relief at not being a part of it.
The plan for the euro zone, by most accounts, has failed, so the exit of one member is no longer such an impossible notion. The idea was for both prices and wealth to stabilize across the member countries, and that has not happened. In 2010, prices in Finland for goods and services were more than 20% higher than the zone’s average, while Slovakia’s prices for those same things were about 30% lower. Income, too, has polarized further, with the richest 20% bringing in about five times what the poorest 20% earn.
The director of the Brussels-based Bruegel think-tank, Jean Pisani-Ferry, was cited in the report saying that Greece would have to lower its debt-to-GDP ratio well below its present 150% before it could resume trading in capital markets. He added that for it to do so, it would require a sustained primary surplus topping 8%. However, no advanced economy other than Norway, with its oil deposits, has managed to stay above a 6% surplus.
Pisani-Ferry was quoted in the report saying, “The situation is so exceptionally severe that it’s hard to see how it can work.”
While default may still be a disaster, possibly even more far-reaching in world markets would be an exit from the euro—devaluation of Greece’s currency may be its only option to avoid the crippling austerity measures demanded by its rescuers.
Devaluation would carry its own problems, but many experts are now of the say it is Greece’s only way out of its dilemma. Martin Jacomb, the chairman of Shire Plc and a former Bank of England director, was quoted saying, “To have an economic future Greece has to be competitive. This involves, especially for sectors such as the tourist industry, lower real wages and that is almost impossible to achieve harmoniously without devaluation.”
He cited Argentina, Czechoslovakia and Yugoslavia as examples of countries that either defaulted or developed their own currencies. Argentina, he said, “was less messy because they still had the peso, albeit devalued, but we have seen countries split and each part develop their own currencies successfully.”