Greece Macro Monitor (May 5, 2015)
Economic and political ramifications of a withdrawal from EMU would be way too severe for such a scenario to materialize
Summary in English
Severe cash constraints faced by the Greek government due to a pretty demanding schedule of interest and amortization payments in the remainder of 2015 have lately engineered a new increase in sovereign bond spreads and rekindled fears of a “Graccident” down the road. Such fears have been exacerbated further in late April as the progress in implementing the February 20th Eurogroup agreement has proven to be rather slow and the cash-strapped State is struggling to meet sizeable debt service obligations. As a result, media reports had been speculating on a number of disastrous scenarios, ranging from the imposition of capital controls or the payment of civil servants and various state suppliers with promissory notes (IOUs) to a sovereign default, either within or outside the Economic and Monetary Union (EMU). This paper refrains from analyzing the legal and technical complications involved in the materialization of any of the aforementioned scenarios. Instead, it leans on purely economic and political economy considerations to argue that calls for exit are ill advised, potentially involving immense risks not only for Greece, but also for the EMU project as a whole. The paper takes a close look at Greece’s high sovereign indebtedness and its persisting competitiveness gap vis-a-vis its main trading partners and explains why a default within or outside the euro area would be a hugely suboptimal (and, in fact, a highly dangerous) strategy to address these problems. Finally, the analysis argues that Greece’s competitiveness gap vis-a-vis main trading partners does not primarily relate to relative labor costs, but rather to non-cost competitiveness problems that continue to hinder investment activity and export performance. Consequently, an external devaluation is unlikely to resolve these problems on a lasting basis and aggressive structural reforms in product and services markets as well as in the domestic regulatory and institutional environment remain an urgent necessity.
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