Some of Denmark’s top economists say that Greece can be expected to leave the euro this year, despite the fact the country is close to reaching agreement on a national debt haircut of some DKK740 billion and therefore a new EU rescue package.
The immediate rescue notwithstanding, seven top Danish economists say that the only way to save Greece is for the country to abandon the euro.
“Even with a haircut, the Greeks are in an impossible situation. Their tax infrastructure is terrible and at the same time there is no prospect of growth in the country,” says Aalborg University Economy Professor Per Kongshøj Madsen.
The final rescue package for Greece is therefore to abandon the euro, Kongshøj Madsen says, as it will enable them to devalue the Drachma, in turn enabling them to regain the competitiveness needed to revitalise the economy.
“In the current situation it is difficult to see any other solution,” Kongshøj Madsen says.
Under the current rescue package, private investors are expected to cancel some 70 per cent of their Greek debt. But even this will only reduce the Greek deficit to 120 per cent of GDP in 2020, compared to the current 160 per cent.
But Copenhagen Business School Economy Professor Finn Østrup says that even after such a dramatic rescue “Greek debt will not be sustainable”, with reference to the rule of thumb that debt must be down to 100 per cent of GDP or less to be sustainable.
Aarhus University Economy Professor concurs that even the new rescue package is far from enough to get Greece back on its feet. Not least because a reduction to 120 per cent of GDP would require the European Central Bank (ECB) and major capital funds to contribute – something they have already said they are unwilling to do.
Nonetheless, Vastrup says Greece will remain in the euro for political reasons.
“The EU’s view will be that Greek democracy will be endangered if they leave (Ed: the euro) and are left alone with the social consequences,” Vastrup says.
Most economists agree that the choice for Greece is one of the devil or the deep blue sea. While Vastrup says the obvious solution is for Greece to remain in the Eurozone, the problem is that as a Eurozone member Greek competitiveness can only be improved by further Draconian cutbacks. A devaluation is not possible.
On the other hand, Greece can leave the Eurozone and devalue. In principle, however, this would increase their debt as euro debt will have to be converted at a lower rate, and with the danger of increased debt, hyperinflation and a run on the banks.
But those who expect a Greek exit from the Eurozone still feel this would be least of the bad solutions, not least because new accounting rules would probably allow Greece to convert one to one.
Østrup also says that the danger of hyperinflation is exaggerated: “There is no empirical reason that wage increases negate the benefits of a devaluation”.
He adds that Greek banks are already experiencing a run which would wane with a floating exchange rate.
“It would be best for the Greek economy to leave the euro,” Østrup says.
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