Saturday, 10 March 2012

Should Greece just default?



The question for Greece is whether to continue its recent path - continued attempts at austerity, which do little to tame the deficit, followed by just enough bailout from the EU to avoid default - or whether to finally admit the obvious: it should default on its sovereign debt, abandon the euro, and go its own way.
If Greece defaults, the country gets immediate relief from the crushing interest payments on its debt, leaving it with a relatively modest primary deficit which excludes the big interest payments Greece is faced with now. If this were to happen, the pressure for austerity would as a result weaken. This would allow Greece to choose policies that encourage growth, rather than ones that shrink the deficit but hold back growth by imposing higher taxes.
By abandoning the euro and adopting a properly valued currency, Greece can restore its international competitiveness. This means greater employment demand from both domestic and foreign sources. Some believe a Greek default is a necessary first step that will provide Greece the breathing room to fix its economic policies in a calm, realistic manner.
The potential negative of default is that Greece will likely lose access to international credit markets for a long period of time, although it will be a much safer investment after default than it is now. But being cut off from foreign lending for a few years is not a disaster, it might encourage cuts in the wasteful and unnecessary parts of the Greek governments spending.
A bigger risk of default is that ending the crisis might reduce pressure for Greece to address the economy's fundamental problems: a convoluted tax code, disproportionate regulation, and an unsustainable public sector.

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