Wall Street Journal
September 26, 2011
The market has learned to take statements by euro zone leaders with a pinch of salt.
First, there were to be no euro-zone sovereign defaults, then none before 2013, then a one-off Greek debt restructuring in 2011. Now, further Greek debt write-downs are back on the table but remain taboo for any other euro-zone country. So what should investors make of the euro zone's ultimate line in the sand: that Greece will stay in the euro?
This is one promise that should be kept. Sure, a Greek euro exit has superficial appeal. As Prof. Nouriel Roubini of the Stern Business School has argued, Greece's problem is not just one of unsustainable debt but a chronic lack of competitiveness.
Greek real wages likely need to fall by around 30%. Either Greece can persist with its unprecedented fiscal squeeze for a decade or more, with all the risk of further social collapse, or it devalues and takes the pain overnight. Experience in Iceland, Argentina and many emerging markets suggests that post-devaluation, the economy could be growing again within a year or so.
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