Doom May Not Be At Nigh Regarding The Euro

Global growth rates are declining, the EU economies are falling into outright recession, and people ranging from Simon Johnson to Tyler Cowen are forecasting imminent breakup of the eurozone with broader catastrophic outcomes more globally (and just to make things even more fun, China, India, Brazil, and other major economies are also decelerating in their growth).  Funny, but for someone who has written a lot about catastrophe theory, I think things may not be quite as bad as all these doomsters are promulgating.

So, much attention is focused on two players: Greece and Spain.  Greece is in an unpleasant downward spiral that has been going on for several years, ever since former PM Papandreou admitted that Greece had been lying about its national income accounts and fiscal accounting.  The latest polls suggest that the Syriza party is leading by 6% for the June 17 election, with many tearing their hair out over this, given that Syriza opposes the "bailout," although they have not yet openly called for exiting the euro.  But that seems to be what is likely.  Doom appears to be at hand.

However, a Grexit may be just what is needed.  Large portions of Greek debt have already been devalued with creditors taking haircuts.  The immediate losses will not be all that great, and many are preparing for what appears to be Greece's likely exit from the eurozone, sooner or later.  Yes, the near term experience in Greece will be unpleasant, just as the decoupling of the Argentine peso from the US dollar in 2001 led to a massive devaluation that impoverished Argentines dependent on imported consumer goods.  But, Argentina later grew rapidly, given its more competitive exchange rate.  Yes, Greece faces technical difficulties in reimplementing the drachma that Argentina did not face, where the peso was still in place.  But after a few years, there is every reason to believe that a Grexit will lead to growth in Greece.

Of course the greater danger that many see flowing from a Grexit is that it will spill over in a contagion to other countries in the eurozone, triggering a run for the exits and a general collapse of the euro.  Yes, that might happen.  However, there is reason to believe that just the opposite might happen.  A Grexit will by its very crisis nature overcome the opposition of the Germans to the ECB engaging in more serious bailouts of banks in troubled periphery countries, which it can easily do.  The obvious case in question is Spain, whose size and travails have led to much market perturbation and freaking out.  A Grexit may be just what is needed to move the ECB to really stop the spiral in Spain.  The ultimate outcome might well be a stabilization of the euro as the decline in Spain is halted, thus removing the pressure on Italy and other nations.  A Grexit may well be just what is needed, both for the Greeks themselves (after a few years) and the rest of Europe as well.