Greece’s exit may become the euro’s envy
If Greece were to abandon the euro it would experience a mega-depreciation. Such a change would necessarily create new opportunities for exports and convert marginally non-tradeable activities into tradeable ones. What these exports might be will, by definition, be unpredictable. But the strong incentives that will be created by a super-competitive exchange rate are undeniable.
LONDON. (FINANCIAL TIMES). Default will be disastrous for Greece and the resulting contagion would be damaging for Europe. So goes the conventional wisdom. The only debate has been about the strength of contagion and the appropriate response of vulnerable countries and of the cheque-writing country. Might the debate be misguided because the premise is flawed? Expelled from the eurozone, Greece might prove more dangerous to the system than it ever was inside it – by providing a model of successful recovery.
There is an overlooked scenario in which default is not a disaster for Greece. If this is the case, the real, more existential threat to the eurozone might be a very different one, in which the Greeks have the last laugh. Consider that scenario.
The immediate consequences of Greece leaving or being forced out of the eurozone would certainly be devastating. Capital flight would intensify, fuelling depreciation and inflation. All existing contracts would need to be redenominated and renegotiated, creating financial chaos.
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