It is in Greece’s interest to leave the euro

by Costas Lapavitsas

Financial Times
May 23, 2012

Greek politics is splitting into two camps to contest the coming election, one led by the rightwing New Democracy, the other by the leftwing Syriza. Both insist Greece must stay in the eurozone, even though New Democracy accepts the bailout programme, while Syriza rejects it. Yet harsh reality is now imposing itself. If Greece stays in the eurozone, it will die a slow death. If it leaves, it will go through a crisis, but will also have the opportunity to recover and reshape its society.

The eurozone crisis has little to do with fiscal incompetence in Greece or elsewhere. Its true cause is cumulative loss of competitiveness by peripheral countries as unit labour costs kept rising relative to the core. Large current account deficits resulted for the periphery, mirrored by surpluses for the core. Debts piled up as deficits were financed by borrowing abroad and as domestic banks expanded lending. There is an unbroken thread running from vast peripheral debt to frozen unit labour costs in Germany.

Austerity and structural reforms were aimed at fixing the problem by crushing wages to reduce peripheral unit labour costs. Even setting aside the social consequences, the task is hopeless as long as German unit labour costs remain in effect flat. Peripheral countries would have to press wages down indefinitely to even approach German levels of competitiveness. The most plausible outcome would be social unrest and eventual collapse of the eurozone.

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