Ben Chu: Argentina managed to survive a huge default – so could Greece do the same?


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It's the inescapable question: would Greece now be better off outside the eurozone than inside? There are powerful and plausible arguments both ways. Those who answer in the negative point out that Athens is still, despite years of massive cuts, spending more than it takes in tax revenues.

This means that if the country were to default on its debts and leave the eurozone tomorrow, it would have to impose brutal austerity on the Greek public – even more brutal than the cuts it is being required to implement at the moment by its eurozone partners. A departure would also destroy the country's domestic banks, which are some of the biggest holders of Greek sovereign bonds.

This would cause domestic financial chaos which would merely deepen Greece's present depression. Those who say Greece would actually benefit from a departure argue that leaving the eurozone would be the first, painful, but necessary step on the road to recovery. If Greece left and introduced the drachma, its exchange rate would plummet, giving a giant boost to exports.

They point out that Argentina defaulted on its debts and dropped its currency peg with the US dollar in 2001 (when everyone said that country would be mad to do so) and went on to enjoy a long period of sustained growth.

The debate does not stop there. "Greece is not Argentina", proponents of staying in say.

There will be meagre benefits from devaluation because Greece's economy, unlike the South American nation, does not have abundant natural resources to export. The country would, they say, be cutting its own throat if it quit the eurozone.

"Nonsense", respond the advocates of exit. A devaluation will not only give a major fillip to Greece's large tourist sector, but would invigorate domestic industry too, since imports would collapse.

Devaluation would also help make the Greek labour market competitive – something that is proving impossible in the single currency straightjacket. "After a short thunderstorm, the sun will shine again," insists Hans-Werner Sinn of Germany's IFO institute.

In truth, no one can really be sure. While it is true that Greece's immediate situation would probably deteriorate if it defaulted in a disorderly fashion and crashed out of the single currency, it is impossible to say how far the country would fall and how long it would remain down.

The degree of agony following an exit would depend on how much, if any, support the country received from the International Monetary Fund and its former European currency partners. Should Greece stay or go? It's not just an inescapable question; it's probably an unanswerable one too.