What's Better For The World: Bailout Or Grexit?
On Monday of this week, American markets rejoiced as Greek leaders and their eurozone creditors finally achieved an agreement over a third bailout after months of frustrating negotiations. Stability, many thought, had finally reached the European economy. The S&P 500 spiked by almost a percent.
The index received another, albeit more modest, boost on Wednesday as the Hellenic Parliament gave the package the green light after a contentious continent-wide debate. On Friday, Germany said it would support the bailout talks despite some disagreement within its government.
But can the answer to months of drama about the future of the Mediterranean state be so simple? Does another several years of the same austerity measures that has helped exacerbate the Greek crisis over the past half decade really chalk up to a healthier Greek (and European) economy?
The most likely alternative to the current framework was a Greek departure from the eurozone, since it didn't seem that German Chancellor Angela Merkel and her European partners would be willing to surrender a more lenient policy sentence for the ailing country.
So which would have been better for Greece in the long run: the recently approved bailout and its accompanying fiscal straightjacket or a defiant march away from Brussels? In this analysis let's weigh both options and give readers a shot to discuss as well.
The Case For Capitulation
It was clear that when the Greek government OKed the bailout on Wednesday evening, it was not facing a best-case scenario. It said yes to deal that was, by many accounts, worse than the one that the country's citizenry had rejected less than two weeks earlier. Indeed, IMF officials and many others held that its terms were too harsh.
Nevertheless, there are many who believe that, in Greece's dire case, something was better than nothing.
For one, the Greek public has been grappling with tight capital controls since late June, when the country's government moved to prevent its banks' assets from completely drying up. Among other restrictions, individual cash withdrawals are limited to €60 per day. But after the Hellenic Parliament submitted to the Troika's demands on Wednesday, ECB president Mario Draghi announced that he would extend additional emergency liquidity assistance to Greek banks, offering a short-term lifeline to the nation's financial system.
Furthermore, for all of the heat that the newly drawn bailout plan has been taken, at least it infuses a level of immediate certainty into Greece's future -- come hell or high road, Greece knows where it stands in Europe and with its creditors. If the country's leaders had moved to exit the euro, the value of the new drachma (which would probably face rapid deflation), diplomatic relations with the rest of Europe, and even the future of other struggling eurozone economies like Spain and Portugal, would all be up in the air.
Plus, it's not as if every Greek citizen opposes the new package, with its tax hikes and pension cuts. "We already paid 55% tax in advance and now we have to pay 28% more on non-existent income," Konstantinos Chantizaridis, a childrenswear factory owner, told The Guardian. "But we have to do it to support the national economy."
So perhaps in spite of the long-term strains they will likely put on the Greek economy, austerity measures were a fair price to pay for immediate relief.
The Case For A Grexit
However, many are saying (and have been saying) that Greece's position in the Eurozone is a poisonous one -- one that will hinder its recovery from this crisis and exacerbate ones to come. Among the most prominent advocates of a Grexit are German Finance Minister Wolfgang Schäuble, who said in a statement earlier this week that the country might be better off alone.
A primary argument of this camp is that Greece's lack of monetary policy autonomy within the currency bloc severely limits its capacity to stave off recessions. At its core, the logic draws on Economics 101. When a country suffers from underemployment and low output, it can print money and lower interest rates to incentivize spending and boost exports. This is precisely how U.S. Fed Chairman Ben Bernanke responded to the U.S. Great Recession -- the echoes of his quantitative easing program are still felt today as the current Fed debates when to raise interest rates for the first time since Bernanke was at the helm.
But since Greece's membership of the common currency union subjects it to eurozone monetary policy, it can't engage in the type of expansionary policy that helped save the American economy (at least not on its own). The Troika would have little incentive to pump free money into Greece, since doing so would likely have an inflationary impact throughout Europe. And while a devalued euro could be good for Greece, it would likely overheat, for example, the German economy which boasts less than 5 percent unemployment.
A common counterargument to the above point is that the United States, which is effectively a currency union between 50 individual governments, seems to function quite well. Therefore, the thought goes, there can't be much wrong with the idea of a currency union itself. But while that may be true, there is something wrong with a European currency union, at least in its current form.
The United States is a much more integrated economy than Europe. According to research by Harvard professor Gita Gopinath, capital mobility between American states is slightly higher than capital mobility between eurozone countries; labor mobility in the United States is much higher. Furthermore, a much larger portion of government spending and taxation in the U.S. occurs at the federal level than in Europe. As a result, the disparities between Connecticut and Mississippi are typically smaller than those between Germany and Greece. Many believe that the lack of fiscal (and thus necessarily political) integration in Europe makes monetary unity a hard sell.
Long story made short, many believe that leaving the eurozone would have been a wise move for Greece, largely because the system itself is broken, especially from the perspective of a reeling economy already on the fringe.
Of course, this specific bailout packages also binds Greece's domestic fiscal policy. By requiring public expenditure cuts and a 3.5 percent primary GDP surplus, Greek officials are powerless to engage in the type of stimulus spending that Obama employed in the United States circa 2009.
And although a Grexit would probably result in massive devaluation of the new drachma and deflation throughout much of Europe, many people across the continent think it would be better for a parting of ways sooner rather than later. Even in Germany, one of Greece's harshest critics, a majority of citizens want the Mediterranean nation out.
Boiled down, it seems that the choice between accepting austerity and leaving the euro is a choice between the long run and the short run. The former option offers short-term stability at the potential expense of long-term growth prospects, while the latter creates a long-term policy framework which is in many ways superior to the current one but concedes immediate financial turmoil.
So were the markets right? Tell us what you think.
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