Why Greece and Cyprus May Be Better Off Without the Euro

image

The battles may be over, but the war is just beginning. Although the Eurozone’s 19 finance ministers recently threw Greece a much-needed economic lifeline, and the latter repaid the first of four loan installments that it owes the IMF in March 2015, there’s no long-term relief in sight for the troubled economy.

Greece has only managed to wrest the four-month extension of a stability program. Soon, the newly elected Alexis Tsipras administration will have to start implementing the cost-cutting measures that it had promised voters it would avoid. The question is whether the austerity program will help or hurt Greece.

Judging by the travails of another struggling Eurozone economy, Cyprus, the outcome is far from certain. Two years ago, the much-hated Troika (the European Central Bank, the European Commission, and the IMF) provided €10 billion to Cyprus after insisting that it should contribute €5.8 billion (later, that went up to €13 billion) to the rescue package. The bailout was small compared to the sums the Troika gave Greece (€240 billion in two rounds), Spain (€100 billion), and Ireland (€85 billion), and the latter was a significant percentage of Cyprus’ GDP of €17.7 billion in 2012. Yet, Cypriot policymakers had no choice but to accept the harsh terms; the alternative would have been economic collapse.

The austerity program is threatening to be more a curse than a panacea, with Cyprus’ economy contracting by 2.4% in 2012; 5.4% in 2013; and by an estimated 2.8% in 2014. In fact, the island’s growth has been below the global average since 2009, with the gap widening since 2012. Unemployment in Cyprus touched 16% last year, with 35.5% of its youth without jobs.

Worse could happen in Greece. While the Troika has refused to budge on the austerity agenda, Greece’s GDP has shrunk every year since 2008, with the biggest contraction being 9% in 2011. With youth unemployment of over 50%, and total unemployment of around 25%, the Greeks’ living standards have plummeted.

Austerity programs, several economists argue, have lost their credibility. When governments reduce fiscal stimuli, it tends to lead to deeper recessions. To be sure, policymakers have to tackle the structural issues, such as bloated public sectors and high national debt, in Cyprus and Greece. However, that should be done over time, and, ideally, when those economies are strong enough to deal with reductions in government spending rather than when they are at their most vulnerable.

Clearly, the exit of both Cyprus and Greece from the European Currency Union is a distinct possibility. The scares about what would happen if they left are unjustified, especially in the medium term.

A return to the national currency would give the governments of Greece and Cyprus control of key economic levers rather than having to bear the fiscal inflexibility and targets necessitated by a single cross-national currency. In fact, Cyprus and Greece probably don’t need to be part of the Eurozone to grow. Cyprus’ growth was higher between 1980 and 2004, before it joined the Eurozone, than between 2004 and 2014, and it has been particularly low since 2008, when it adopted the Euro. There’s no reason why its economy cannot be strong without being part of the Eurozone, or that foreign currency deposits will flee the island if the local currency is not the Euro.

An alternate way forward may be to use higher government spending to assist vulnerable people, to lend to business, and to execute projects that inject money into the economy. The state can do that in conjunction with structural reforms that will, over time, reduce the size of the public sector, increase the flexibility of labor, improve tax collections, invite foreign direct investment, and get debt under control. The relatively cheap national currencies would provide a boost to exports, real estate, manufacturing, agriculture (for instance, olive oil production), and services such as tourism.

Business thrives under conditions of certainty, which has been sorely lacking in Cyprus and Greece since the implementation of the austerity agenda. A managed exit from the common currency could alter that.

Local companies would be able to focus on globalization strategies and exports in order to capitalize on cheaper currencies. They would become more efficient and productive; they would have to optimize the use of more expensive imports. Foreign companies might find the greater confidence and low costs attractive for making investments in Greece and Cyprus, which would further enhance business confidence. These outcomes seem more desirable than an era of austerity with no end in sight, an epoch that will leave Greece and Cyprus unable to cope with future crises.

HBR

Advertisements

About lankapage

We are an online publication (Educational Purpose Blog) made up largely of what we call “disintermediated” news – that is news without a spin put on it by a journalist, published as it’s delivered to Lankapage. All copyrights belong to their respective owners. Images and text owned by other copyright holders are used here under the guidelines of the Fair Use provisions of United States Copyright Law. Images and text are used here only for the education purpose and are not intended to generate income for the blog, its employees, or its students. That makes us unique. All content is delivered to you as the writer or producer intended — leaving only you to make judgments about what you read or watch, not us.

Posted on March 11, 2015, in Sri Lanka. Bookmark the permalink. Comments Off on Why Greece and Cyprus May Be Better Off Without the Euro.

Comments are closed.

%d bloggers like this: