Greece: What Leaving Means

The Lehmann Letter (SM)

  

Greece may no longer have the economic base to remain viable under any circumstance.

Although economic doctrine decrees: Devalue you currency to stimulate your economy. If your money costs less, your goods will be cheaper for the rest of the world. As your exports surge, so will production. Economic problem solved.

“Not so fast,” say many Greeks.

See two excellent New York Times articles to understand the practical pitfalls for Greece of exiting the euro.

Begin with today’s:

Facing a Teetering Greece, Europe Plans for the Worst

http://www.nytimes.com/2012/05/25/world/europe/risk-of-greek-euro-exit-has-europe-making-plans.html?ref=todayspaper

Here’s a key paragraph that describes another consequence of devaluation:

“But there would also be grave side effects. Economists at Citigroup estimate that the new drachma would plunge 60 percent against the euro as soon as currency markets opened. The prices of imported oil and other commodities would soar in drachmas, potentially canceling out the benefits of devaluation.”

The point: Soaring import prices would generate cost-push Greek inflation, and rising costs for Greek exports would offset any price-reduction benefit of devaluation. Consequence: No export surge and no economic recovery.

Finish with this article that appeared Wednesday:

Greek Businesses Fear Possible Return to Drachma

http://www.nytimes.com/2012/05/23/world/europe/greek-businesses-fear-switch-from-euro-to-drachma.html?ref=lizalderman

Here’s what the president of the Athens chamber of commerce thinks as he reflects upon Greece’s skimpy industrial infrastructure:

“…hopes of a broader export-led recovery may be little more than a chimera, said Mr. Mihalos, the chamber of commerce president.

“Aside from shipbuilding, most of Greece’s industrial base has eroded in the 30 years since the government nationalized large areas of industry. Wealth-generating businesses diminished, and tens of thousands of laid-off workers were absorbed by the state to reduce unemployment.

“Today, Greek exports of manufactured products account for only 10 percent of gross domestic product, compared with a 30 percent average for the rest of the euro zone. In addition, Greece’s adoption of the euro hastened a steady shift away from agricultural production. Today, Greece imports nearly 40 percent of its food, most of its medicine and almost all of its oil and natural gas, a situation that may lead to shortages if international suppliers halt business for a period.”

It doesn’t look good.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann