Editorial
January 4, 2012
Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.
We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.
The euro secessionists’ reasoning goes like this: Suppose Greece somehow resolves its short-term debt problems through default or other means and brings its budget deficits back under control. It will still have to deal with a crippling lack of competitiveness.
Labor costs in Greece have risen much faster in recent years than in Germany and the rest of the euro core, making its exports expensive and imports cheap. The result is chronic trade deficits, which must be financed through continued borrowing.
If Greece still had a drachma to devalue, it could cut the price of its exports and raise the price of its imports that way. Because it doesn’t, it has to restore competitiveness more brutally: by cutting wages, which in turn requires persistently high unemployment to suppress workers’ bargaining power. The present recession is bad enough, goes the argument. Extending it indefinitely would be politically impossible and an economic disaster. That leaves an exit from the euro system as the only choice.
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