Argentina scenario: Populism continuously erodes economic foundations The devaluation of Greece’s new currency, for all its potential positive impacts on cost competitiveness, would have a devastating effect on the living standards of Greece’s poor and middle classes, who would be faced with massive inflation.
Wealthier households have probably already parked and protected their money abroad and could benefit from the devaluation by repatriating part of their funds to buy up assets on the cheap. However, the less well-off have little to park and repatriate. Instead, their drachma incomes would be insufficient to pay for imported food and energy. For example, Greek food imports account for 12% of total imports, compared to only 7% in Germany. Much of that could probably be substituted with domestic produce, but that might not alleviate price pressures much as Greek farmers would prefer to sell their produce abroad at higher prices, too. To alleviate the pain, the government might be tempted to try to restore political capital by using its newfound monetary independence to print the money it needs for a lavish social assistance program and public sector job creation. The central bank would lend directly to the government, thus creating permanent inflation. Price controls for food and other goods may artificially contain official inflation rates, but may outsource the problem to the black market. Greece’s inflation would likely remain in double-digit territory, while the government would try to ensure its survival by blaming the rich for the failures and for keeping their money abroad. Many in Syriza have such leanings, not least the party’s chief economist, John Milios, who advocates the monetization of government debt in the Eurozone as a whole. This is the Argentina or Venezuela scenario. However, those countries can rely on their natural resources to bring in hard currency. No obvious solutions Greece, in contrast, would have to rely on tourism, which requires political stability. Restoring market access with Syriza leadership and policies would be extremely difficult, but would provide another convenient scapegoat for a populist government in Athens: international investors who do not lend to the country. The structural weaknesses of the Greek economy, especially the labor market and product market rigidities and the stranglehold of vested interests over policy making would not go away with the euro. If nothing changes, Greece would very quickly become uncompetitive again and have to devalue once more. Successive devaluations would reduce the incentive for foreign and domestic investors to invest. This would lead to chronic underinvestment in the economy, making it more difficult for Greece to close the income gap with its European neighbors. Whether tourism can thrive in an environment of widespread poverty for large parts of the population is another open question. Staying in the EU, while it keeps open access to the biggest internal market in the world and secures transfer payments, could also prove a challenge. Greeks might vote with their feet. If the future government failed to restore economic prosperity, the EU’s free movement of labor could swell the ranks of Greek émigrés, further undermining the long-term potential of the economy. full: http://www.theglobalist.com/greeces-future-after-grexit-another-argentina-or-mimicking-the-uk/ _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
