Financial Times
August 15, 2012
According to Greek mythology, the noble Iphigenia was sacrificed so that the warships could have a fair wind to Troy. According to eurozone mythology, Greece should become the Iphigenia for the euro to sail ahead. However, this sacrifice would fail to do the trick. Since Greece cannot access capital markets and Greeks have no appetite to leave the eurozone, a “Grexit” would have to be a decision made by Brussels and Berlin. Would the eurozone be justified in ejecting Greece? And would it be wise?
A familiar argument in favour of a forced exit is that Greece has failed to reduce its budget deficit. True, the deficit remains high and public sector reform is struggling. Yet, if one focuses on the improvement so far, a different picture emerges. For example, Greece cut its total primary budget deficit by 8.2 percentage points of gross domestic product over two years (2010 and 2011).
Doomsayers also look at Greece’s trade deficit and predict it will never restore competitiveness. However, labour market liberalisation and steep wage cuts are delivering the “internal devaluation” required. If labour costs are included, Greece’s effective exchange rate is at its most competitive for more than a decade.
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