The standard of living reached in Greece since it joined the European Union means austerity will be inadequate to rebalance the economy. Returning Greece’s currency to the drachma, on the other hand, would allow market forces to set the country’s wage levels, induce other indebted European Union members to reform without Continental prodding and thus solidify the euro.
Greece’s gross domestic product per capita of $30,400 in 2008 was close to the European Union average. It was caused not by an exceptional surge in productivity, but mostly by huge subsidies and extensive borrowing. Greece’s continuing current account deficit, estimated by The Economist at 8.3 percent of gross domestic product in 2011 despite a severe recession, indicates that it remains deeply uncompetitive.
By comparison, 2008 G.D.P. per capita in Bulgaria was reported as $14,000 and in Macedonia, $10,700. Yet it has been 20 years since Communism fell and market forces are dominant in both economies. Even Portugal’s G.D.P. per capita falls short of Greece’s.
This suggests Greece may require living standards to decline by as much as 40 percent to become competitive. Such an adjustment is impossible through austerity alone. Civic unrest shows further belt-tightening could produce political reactions deeply damaging to Greece’s future. Assuming further subsidies from European Union taxpayers are politically unlikely, a Greek replacement of the euro by a new drachma seems to be the only alternative.
This would be problematic, but not impossible. The two most relevant precedents are Argentina, which in 2001-2 abandoned a one-to-one link between the peso and dollar, and the new states created from the former Soviet Union and Yugoslavia, which introduced new currencies.
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Greece’s gross domestic product per capita of $30,400 in 2008 was close to the European Union average. It was caused not by an exceptional surge in productivity, but mostly by huge subsidies and extensive borrowing. Greece’s continuing current account deficit, estimated by The Economist at 8.3 percent of gross domestic product in 2011 despite a severe recession, indicates that it remains deeply uncompetitive.
By comparison, 2008 G.D.P. per capita in Bulgaria was reported as $14,000 and in Macedonia, $10,700. Yet it has been 20 years since Communism fell and market forces are dominant in both economies. Even Portugal’s G.D.P. per capita falls short of Greece’s.
This suggests Greece may require living standards to decline by as much as 40 percent to become competitive. Such an adjustment is impossible through austerity alone. Civic unrest shows further belt-tightening could produce political reactions deeply damaging to Greece’s future. Assuming further subsidies from European Union taxpayers are politically unlikely, a Greek replacement of the euro by a new drachma seems to be the only alternative.
This would be problematic, but not impossible. The two most relevant precedents are Argentina, which in 2001-2 abandoned a one-to-one link between the peso and dollar, and the new states created from the former Soviet Union and Yugoslavia, which introduced new currencies.
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