Department of “Huh?!”: Greek Exit Scenario Evaluation

Over at Equitable Growth: I truly do not understand this argument by the very sharp Daniel Davies:

Daniel Davies: Comment on Greece, Decision Theory, and the Sure-Thing Principle: “If Greece stays in the Euro it is likely to need constant transfers forever…

…If it leaves, but stays in the EU, then these can be reduced from a level in the tens of billions to something like what Romania or Bulgaria get….

The reason, of course, the transfers can then be reduced is that a Greece out of the euro re-denominates its debt in Greekeuros — drachmas — which go to a substantial discount vis-a-vis the euro, thus devalues, begins to have an export boom, and sees a strong economic recovery. What’s the problem?

Daniel continues:

Greece also loses political influence, and so can’t cause as many problems as it has in the past about things like the Balkans or Turkey…

So the Former Yugoslav Republic of Macedonia gets to call itself “Macedonia” (or “North Macedonia” or “Heartland Macedonia” or whatever), the chances of resolving Cyprus go up, etc. In short:

There’s a lot of favourable things about Greek Euro exit from the point of view of creditor states….

But then he turns on a dime:

I still think losing Greece would be a net negative for Europe (and a tragedy for Greece, albeit that if the EU had spare capacity to make transfers, Romania is a more needy candidate)…

Why is economic recovery — casting the German austerity boat anchor over the side — a tragedy for Greece?

The old argument was that Greek exit from the euro would administer a massive deflationary shock to the European economy as everybody scrambled for safety and thus dumped their southern European sovereign-debt bonds for northern European ones, that it was important to avoid such a deflationary confidence shock, and that as a result Europe would supply enough transfers to make staying in the euro more attractive to Greece than the disruption of exit followed by recovery. That chain of argument has turned out to be wrong.

Does Daniel think that the deflationary shock is not there? That would seem to be implied by his statement that Greece is a “financial liability” to the creditor states. But in that case why have we been dinking around for five years now?

Originally published at