Greece needs a plan B based on quitting the euro
A letter to the editors

Sir, Your editorial exhorting the newly elected Greek government to find ways to work with the troika overlooks the grievous damage that the troika has already wrought on the Greek economy (“Samaras’s challenge”, July 19).

In particular, it glosses over the contribution that troika-imposed hair-shirt fiscal policies, within a euro straight jacket, have made to the 16 per cent decline in Greek gross domestic product over the past three years and to the further 6-7 percent GDP decline now widely forecast for 2012.

"One would have thought that by now we would have learnt how little sense it makes to pursue aggressively pro-cyclical policies in the depths of an economic depression." -Desmond Lachman

One would have thought that by now we would have learnt how little sense it makes to pursue aggressively pro-cyclical policies in the depths of an economic depression. Yet that is precisely what the troika is prescribing for Greece right now. Not only does the troika want Greece to correct the budget slippages due to a deeper than expected economic contraction in the current year, but it also wants Greece to cut public spending by about 5½ percentage points of GDP in 2013 and 2014.

To be sure, Greece has no realistic alternative but to correct its public finance imbalances. However, Greece’s tragic experience over the past two years would suggest that to do so within the euro straitjacket is a sure-fire recipe for a deepening and a prolongation of the economic depression in which the country already finds itself. And experience would also suggest that any such deepening would seriously undermine the very effort of correcting the country’s public finances.

If ever there were the need for a plan B it has to be in Greece. The central element of any plan B for Greece has to be the country’s exit from the euro. For such a move would afford the country with the means to promote its tourism and trade sectors as an offset to the negative effect of fiscal tightening on the country’s level of output and employment.


Desmond Lachman, American Enterprise Institute, Washington, DC, US

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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