Larry Summers, the former secretary of the Treasury, wrote a scary column in The Financial Times warning that Greece may be on the verge of becoming a “failed state.” It’s a useful corrective to the extraordinary complacency I’ve been hearing from too many European officials. But I do think it’s worth pointing out that this need not happen, even if there is no deal.
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What Mr. Summers seems to portray is a scenario in which Greek banks collapse and take down the economy with them. But what if Greece abandons the euro and issues its own currency to keep cash flowing?
For sure there would be a sharp devaluation, which would lead to a spike in inflation. But would hyperinflation inevitably follow? Remember that Greece is running a large cyclically adjusted primary surplus – so, given a modest economic recovery, the country would not need to roll the printing presses to pay its bills. And devaluation would, all other things being equal, promote recovery.
I know that many people are telling stories about immediate collapse due to Greece’s inability to buy raw materials, a complete failure of exports to respond and so on. They could be right. But I can’t think of any historical examples that fit this story – in particular, all the hyperinflation cases I know of involved governments that were too weak to collect taxes, and, believe it or not, that’s not true of Greece, despite all you’ve heard.
So even if Greece goes over the edge in the next few days, there may be another off-ramp from the road to ruin. And at that point, the European problem would turn on its axis, as the FT columnist Wolfgang Munchau says, and become one of coping with the euro’s evident reversibility.
Voters Always Want a Strong Currency
Even as the prospect of Grexit moves from inconceivable to plausible, polls consistently show that Greek voters want to stay with the euro. But what does this tell us?
Not very much – I’m pretty sure that voters consistently want their currency to be strong. The advantages seem obvious, and there’s also an element of national pride.
Meanwhile, the difficulties created by an overvalued currency are obscure, except to those directly engaged in exporting.
That’s an impressionistic view, but is there data to back it up? Searching the iPoll database on American public opinion doesn’t turn up much, but here’s an interesting result from 1985, when the dollar was very strong (so strong that the Group of 5 famously met at the Plaza Hotel in New York to agree on a plan to push it down):
When The Los Angeles Times asked people, “Would you say that a strong US dollar is good for this country or bad for this country,” 64 percent answered “good.”
So if Greek voters oppose the idea of a new drachma that would surely be weak against the euro, they’re just echoing the preferences of voters always and everywhere.
Of course, that consistent preference may itself matter, just as the eternal popularity of the household metaphor for fiscal policy – voters always favor a balanced budget – is one reason that Keynesian economics is so hard to apply. But I don’t think there’s much news in the fact that most Greeks favor keeping the euro.