Must-Read: Barry Eichengreen: Path to Grexit Tragedy Paved by Political Incompetence: “The country is seemingly on the slippery slope to exiting the euro….
…Nearly a decade ago, I analyzed scenarios for a country leaving the eurozone. I concluded that this was exceedingly unlikely to happen…. So where did this prediction go wrong?… The costs, I concluded, would be severe and heavily front-loaded… a bank run… shutter[ing] the financial system… losing access to not just their savings but also imported petrol, medicines and foodstuffs…. Not only would any subsequent benefits, by comparison, be delayed, but they would be disappointingly small…. Any improvement in export competitiveness due to depreciation of the newly reintroduced national currency would prove ephemeral…. Greece’s… leading export, refined petroleum, is priced in dollars and relies on imported oil…. Agricultural exports… will take several harvests to ramp up. And attracting more tourists won’t be easy against a drumbeat of political unrest….
I stand by the economic argument. Where I need to mark my views to market, however, is for underestimating the role of politics…. Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle…. Prime Minister Alexis Tsipras and his government…. If it was unwilling to accept the creditors’ final offer, then it should have stated its refusal…. The decision to call a referendum in midstream only heightened uncertainty…. Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF… [that] opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost… continued to resist it in 2015… calculated the… primary budget surpluses that Greece would have to run… to hypothetically repay its debt… required the government to raise taxes and cut spending… ignored the fact that… they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved. The implication is clear. Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.