Greece: Growth after Collapse!

In my recent post, I argued that Greece as a peripheral Euro country will suffer severely from a collapse of the Euro. Depreciation of the new domestic currency will extirpate national savings – this expectation will trigger a bank run and a capital flight leading to bankruptcies in the private sector especially for banks. Workers will suffer from low real wages and high unemployment. Also the government’s burden of liabilities denominated in Euro will grow by the devaluation of the domestic currency; a default of the government is not unlikely. Still, Greece will return to economic growth a few years after the crisis!

A highly depreciated currency makes exports extremely cheap in the world market. Although Greece might not yet have products for export, low real wages increased competitiveness such that many opportunities exist to produce for export. In addition, imports will be expensive because of the depreciation. Therefore, domestic industries will be more competitive and import substitution industries will grow. High exports and low imports will lead to a current account surplus. Wages will increase pushing domestic consumption. Also the depreciated currency makes assets cheap for foreigners such that investment will become very profitable. Therefore, it is likely that Greece will return on an economic growth path after a collapse.

Other countries like Russia and Argentina are examples for high growth after a crisis with default. Of course, their growth was positively impacted by export of commodities (oil and soy) but this cannot explain alone the strong growth. However, Russia and Argentina were not subject to trade restrictions. It is possible that remaining Euro countries will increase tariffs and quotas to protect their economies from cheap Greek imports. This would certainly negatively affect Greece’s growth and is not completely unlikely. Core Euro countries will suffer from an appreciated remaining Euro (or their local currencies) making their exports less competitive.

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