As of today the idea that Greece might be better off leaving the Euro and renegotiating its debt is considered by many to be unthinkable. Instead, the country is embarking upon a program of "internal devaluation" -- in which it keeps the Euro and lowers its real exchange rate by creating enough unemployment to drive down the country's wages and prices.
Let's compare this process to two other countries that have tried it -- one which abandoned it after three and a half years -- Argentina -- and one that is continuing it -- Latvia.
First, Greece: Figure 1 shows the IMF's April 2010 projections for real (inflation-adjusted) GDP. Note that in 2015, Greece still does not reach its pre-crisis (2008) level of GDP. However, these projections are already out of date; the current projections from the Greek Finance Ministry show a 4 percent decline for 2010, whereas the IMF's projections had only shown a 2 percent drop. Moreover, it will most likely be worse; when Latvia began its "internal devaluation" in 2008, the IMF projected a 5 percent drop in GDP for 2009; it came in at more than 18 percent. Result: Greece will probably need at least 8 or 9 years, if things go well under the current program, to reach pre-crisis output.
FIGURE 1
Second, Latvia: As can be seen in Figure 2, Latvia -- which set a world-historic record in 2008-2009 by losing more than 25 percent of GDP -- is not expected to reach even its 2006 level of GDP in 2015. And in 2015, it is still 16 percent below its pre-crisis peak in 2007. Result: well over a decade to return to pre-crisis GDP, barring unforeseen negative events.
FIGURE 2
Sources for Figures 1 and 2: IMF International Financial Statistics and World Economic Outlook.
Third, Argentina: Figure 3 shows Argentina's recession beginning in the middle of 1998. Argentina tried the "internal devaluation" process -- its currency was pegged at 1 to 1 to the dollar -- until the end of 2001, leading to an economic and financial collapse. In December 2001-January 2002, the government defaulted on its debt and abandoned the fixed exchange rate. Result: after the default/devaluation, the economy continued to shrink for just one quarter (first quarter 2002). It then grew and passed up its pre-crisis peak within three years of the default and devaluation, with real (inflation-adjusted) growth of 63 percent over 6 years.
FIGURE 3
Source: Instituto Nacional de Estadística y Censos, República Argentina.
Conclusion: before making a commitment to indefinite recession and slow recovery, including many years of high unemployment and other social costs, Greece may want to consider the alternatives. They may be less painful and allow for a speedier, more robust economic recovery.
This column was published by The Guardian Unlimited on May 18, 2010.
But this is not news to the Greek government, or the IMF or the EU... It's certainly not news to the millions of Greeks protesting in the streets right now... It IS news for anyone who listens to FOX news or CNN... but the real problem is the policy makers know what they are doing is wrong, but they also answer to the people who benefit from these same mistakes we make over and over...
anywho.. good post...
River
http://gratefullost.wordpress.com/
But is your point that Greece should pull out of the Euro zone? Is there no other way?
"its currency was pegged at 1 to 1 to the dollar -- until the end of 2001, leading to an economic and financial collapse."
some things you glossed over or ignored on Argentina:
1975 Left Wing Govt - Rodrigazo overnight devaluation destroyed economy -peso not linked to dollar
1979 Right wing government - Nationalization of all debts to deal with wrecked economy - new peso not linked to dollar
1982 Right wing government - Invasion of Falklands to tkae spotlight off hyperinflation
1989 Plan Bonex wipes out all savings accounts and deposits, no debt taken on in previous 6 years - Austral not linked to dollar.
Is the author still comfortable in his smug conclusion that "currency was pegged at 1 to 1 to the dollar -- until the end of 2001, leading to an economic and financial collapse"? really??? Maybe the currency was linked to the Argentine Government. There is a trend, you know.
HA HA HA HA!!!!!!
http://www.atfa.org/cgi-data/news/files/914.shtml
Nothing that comes out of that Propaganda Machine has been reliable for almost 10 years.
"HAVE to applaud them for taking the default option......"
Must be easy to applaud someone when your whole life was not ruined by it, like half the Argentine population. Do you feel comfortable in your applause? I hope so.
"The only thing wrong with that is that probably the banksters in the US will whine to the US government and get a bailout for the dollars that they risked in Argentina"
They defaulted 8 1/2 years ago. How much has the US bailed out these banks? ZERO CENTS? yes, that's correct. Mainly Spanish Banks and HSBC, anyway. Only Citibank and BankBoston were there, they worte it off and that was it. In fact, Argentina bailed out the banks by forcing the little guy despositor to lose all his savings. How would you like your savings account drained to bailout the banks? Would that feel good? That's what happened.....
Good Lord, I can't believe how little people know of the situation and feel compelled to make sophisticated recommendatiosn on this. I'm talking about the author, not the commenters, who I know should not understand the situation as they didn't live through it.
1. You can only do it once
2. Does not fix structural problems
I would expect that this strategy would work for Greece in short-term. But long-term they will be better off. As Pauldeba mentioned, Argentina's problems were not solved over the long-run.
People that lost their life savings in the bank freeze, people who went bankrupt and never recovered. A LOT, nothing like the US foreclosures. MOST people lost at least 50-75% of their savings acucmulated over decades. Confiscated by the government. they have never gotten it back. Those who had their 401K's confiscated by the government (including me)
People that have been victims of the skyrocketing crime. argentina was very safe in the '80's, moderatelye safe in the 90's, dangerous now. Some Colombian cities like Medellin are safer than parts of Argentina now.
The base of this growth is the writeoff of $65 billion of money they borrowed and won't repay and another $60 billion of devalued direct foreign investment. as long as someone wants to donate another $120 billion and they get the advanatage of another commodity boom (doubtful) they'll continue to grow. The place is a mess. getting a job is impossible even with connections.
And to pay a government with 25% Phantom work force (Noquis that are related to politicians that only show up once a month to collect their paycheck, probably not even that now with direct deposit). a medicare systems where $7 billion just went missing.
Growth has been linked to ONLY agriculture and commodities and only because of FX rates and the commodities boom. No one else has benefited, no industry, no service sectors. A lot of people can complan, that's who
You should learn a little more about the siituation before popping up a PPP GDP chart to prove some foolish point.