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Greece, austerity and the failed euro experiment

Photo: chris-sy/flickr

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What a tumultuous few weeks we witnessed in Greece. Though the victory of Syriza was ill-received in particular in Germany and the European Central Bank, it was nonetheless a resounding victory for democracy. This victory may now spill into other countries and give much credence in particular to the Spanish Podemos party.

Moreover, recent German threats to throw Greece out of the euro-zone only further masks what is increasingly becoming evident: the euro is a flawed and poorly designed institution that condemns Europe and her citizens to many more years of misery. The only real solution to the euro problem is to abandon the single currency altogether.

The refusal of many European countries to deny Greece the dignity of negotiating better terms on its debt repayment only betrays history, and the generosity and good will the world showed Germany in 1953. This continued hostility could pave the way to a grexit ("Greek exit" from the euro) in light of a leaked report showing Angela Merkel's secret (or not so secret) desire to see Greece ejected from the Euro-zone altogether.

There are so many things wrong here that it is hard to know where to begin. Europe is in a real mess, and there is no way of sugarcoating it. On this, we all agree. But where we disagree is on the causes and solutions to this mess. Yet, what is even more striking is the incredible lack of understanding from the European leaders on how monetary institutions work.

The cause is now becoming increasingly clear, even to the most reluctant of skeptics: austerity has made the economic situation even more unbearable. Instead of resulting in lower debt and increased activity, it resulted in more debt and less growth.

As to a possible solution, Merkel believes Greece can be pushed out of the euro-zone with very little damage to the rest of the euro-member countries. Greece, on the other hand, believes Europe has invested way too much political and economic capital that it won't follow through on its threats to eject it.

Here, I think, Merkel is right. I don't really think it will hurt Greece in the long run, although there may be some turbulence and instability in the short run. But over time, Greece would be better off to abandon the euro and return to the drachma. In other words, the costs of staying with the euro far outweight the costs of returning to the drachma. In that sense, a grexit is a sensible solution. The euro is a sinking ship and Greece would be best advised to abandon the euro-Titanic as fast as possible, and leave other countries to come to the same realization.

I held this position at a conference in Grenoble in May 2014, although it was far from receiving an enthusiastic ear. Recently, however, Joseph Stiglitz echoed this sentiment when he told CNBC: "If Greece leaves, I think Greece will actually do better. … There will be a period of adjustment. But Greece will start to grow," he said. "If that happens, you are going to see Spain and Portugal, they've been giving us this toxic medicine and there's an alternative course."

Abandoning the euro is only one possible solution, of course, as there are two others:

1) If Europe chooses to keep the euro, then there must be important institutional changes, starting with moving toward greater political union. The problem with this solution is that it very clearly rejected by Germany, who does not want to share her wealth with the poorer countries, which they see as the authors of their own misery.

2) The status quo: Europe maintains the euro and rejects political union.

The first solution, although certainly the best of all three, is politically impossible, and a non-starter. There is no great desire to see a political union. Given this, the real choice is simply to either stay with the status quo with continued austerity and deflationary policies, or leave.

For Greece, leaving the euro is the right decision although Greeks have made clear this is not a possibility, but it would nevertheless be the right move. And it would have the following advantages.

1) Greece would gain back its monetary sovereignty, an indispensable policy tool. An interest rate policy of the Greeks, by the Greeks and for the Greeks that will ensure that Greece does not perish from this earth.

2) Greece would have an exchange rate all its own again, and could devalue it according to its internal needs and attempt to spur the export industry. Right now, the euro is overvalued relative to the Greek economy, and is further hurting any possible chances of recovery.

3) With its own ability to finance its debt, Greece would be able to conduct an appropriate fiscal policy and abandon austerity measures.

The prognosis for Europe is bleak, and for Greece, the hour of reckoning is near. The continued use of the euro, without adopting the necessary institutions like political union, is simply lunacy and proof of the power of political interest over economic necessity. Stiglitz echoed these sentiments recently: "Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone."

In the end, the euro experiment was an utter failure. The mess it has created will take years or a generation to repair. It is time to recognize this, abandon it and let sovereignty return to Europe. Greece is better off with its own currency, brave the short-run instability and power forward.

This is a guest blog post from Louis-Philippe Rochon.

Follow him on Twitter @Lprochon.

Photo: chris-sy/flickr

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