Wall Street Journal
May 14, 2012
Greece's future in the euro zone hangs in the balance. If it can't produce a government capable of implementing the structural reforms required to secure continued euro-zone funding, it will have little option but to quit.
Many argue this would be no bad thing—that Greece stands no chance of recovering inside the euro zone and that its only hope lies in a euro exit and devaluation. Indeed, some argue that all the peripheral euro-zone countries would benefit from quitting the euro: Sure, there would be a short, sharp shock. But they would soon start growing again. Look at what happened after the collapse of the gold standard in the 1930s, or to the U.K. after it left the Exchange Rate Mechanism in 1992, or to Argentina, which devalued in 2002 and has averaged 7% growth since.
Of course, economists haven't always regarded devaluation as a panacea. In the 19th century it was an article of faith that all major currencies were convertible into a fixed quantity of gold. The current governor of the Bank of England, Mervyn King, talks of devaluation as a virtue, but most of his predecessors considered the idea morally repugnant, a form of default that would permanently damage a country's standing.
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