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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