Greek economy may recover faster than we think

The pain of a Grexit would be relatively short-lived, some think

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The Independent Online

Many believe that Syriza ministers, for all their radical rhetoric, will be desperate to avoid a Greek exit from the single currency and will thus be eager to compromise with their European creditors.

The assumption is that a Grexit would be catastrophic, inflicting even worse economic damage than the country has experienced in recent years. Banks would fail. Unemployment would shoot up still further. The economy would return to recession.

A delinquent Syriza-led government, unable to raise money on the private bond markets, would be forced to print money to pay government workers, setting off a tidal wave of inflation.

The opinion polls seem to suggest that Greeks believe they would be worse off out of the euro, with a large majority still in favour of remaining in the single currency.

Yet Mark Weisbrot, of America’s Centre for Economic and Policy, has a different view on the economic consequences of Greek exit.

He suggests that while Greece would experience a severe financial shock if it crashed out of the bloc, the pain would be relatively short-lived and would soon give way to an export-led boom as a result of its new terms of trade. Weisbrot thinks this scenario is what keeps policymakers in Berlin and Brussels awake at night. “The fear is not what will happen to financial markets [but] that Greece would, after an initial crisis, recover so much faster than the rest of the eurozone that other countries will also want to exit.”

That may be too optimistic as far as Greece is concerned. But it is not totally implausible. Argentina was economically crucified by its dollar peg in the early 2000s but grew rapidly after finally breaking it.

What the two scenarios underscore is the inherent uncertainty of economic outcomes. Berlin and Brussels would be foolish to assume they are negotiating from a position of overwhelming strength when they sit down opposite Syriza in the coming days.