Greece and Cyprus might be better off out of the European common currency bloc, a Harvard Business Review report said.
According to the writer, Loizos Heracleous, long-term relief for the troubled Greek economy is very unlikely, if the current situation continues. The four-month extension the country received means the Alexis Tsipras government will have to start implementing some austerity measures, contrary to election campaign promises, and it is not certain that austerity will benefit Greece.
Using Cyprus — which entered a bailout program in 2012 — as an example, austerity did not help the island. The economy shrunk steadily since then and unemployment reached 16%.
Worse could happen in Greece, the report said. While international creditors have refused to budge on austerity, Greece’s GDP has shrunk every year since 2008, with the biggest contraction being 9% in 2011. With unemployment at over 25%, the Greeks’ living standards have plummeted.
Austerity programs, several economists argue, have lost in credibility. When governments reduce fiscal flow, it tends to lead to deeper recessions. In Greece and Cyprus, policymakers have to tackle structural issues, such as bloated public sectors and high national debt. However, that can only be done when economies are strong and can deal with reductions in state spending.
Heracleous believes the exit of both Cyprus and Greece from the Eurozone is a distinct possibility. The scares about what would happen if they left are unjustified, though. Especially in the medium term.
A return to the national currency, he argued, would give the governments of Greece and Cyprus control of key economic levers rather than having to bear the fiscal inflexibility and targets necessitated by a single cross-national currency. In fact, Cyprus and Greece probably don’t need to be part of the Eurozone to grow. Cyprus’ growth was higher between 1980 and 2004, before it joined the Eurozone, than between 2004 and 2014, and it has been particularly low since 2008, when it adopted the common currency. There is no reason why its economy cannot be strong without being part of the Eurozone, or that foreign currency deposits will flee the island if the local currency is not the euro.
Another way forward for Greece and Cyprus would be to use higher government spending to assist vulnerable people, lend to businesses and execute projects that inject money into the economy. The state can do that in conjunction with structural reforms that will reduce the public sector size, increase the flexibility of labor, improve tax collection, invite foreign direct investment and get debt under control. The relatively cheap national currencies would provide a boost to exports, real estate, manufacturing, agriculture and tourism.
Furthermore, the writer argued, business thrives under conditions of certainty, which has not been the case since Cyprus and Greece implemented the austerity agenda. A managed exit from the common currency could alter that.
The report concluded that Greek and Cypriot companies can focus on globalization strategies and exports in order to capitalize on cheaper currencies. They would be forced to be more efficient and productive and would have to optimize the use of more expensive imports. Foreign companies might find the greater confidence and low costs attractive for making investments in the two countries. These options seem more desirable than the continuation of austerity with no end in sight, a situation that will leave Greece and Cyprus unable to cope with future economic crises.
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