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Response: No, Greece cannot default. Leaving the eurozone would be a disaster

Returning to the drachma would lead to turmoil and runaway inflation

Costas Lapavitsas argues that “exit is the most sensible way for Greece to restore competitiveness and start to recover” (Greece must default and quit the euro. The debate is how, 20 September). But this “solution” would cause huge problems to ordinary Greeks and, above all, would not deal with many of the political, social and economic causes of the country’s economic malaise.

Just like many economists who share his disdain for the euro, Lapavitsas claims that after a coercive (as far as the banks are concerned) default, and exit from the eurozone, “recovery should start in a few months, spurred by devaluation that would allow industry to increase exports and recapture the domestic market”. In reality, the first beneficiaries would be the privileged few who have already taken advantage of the free movement of capital and stashed their savings in hard currency abroad. Ordinary Greeks would lose half of their savings overnight.

As the new drachma would be both much weaker and cheaper than the euro, its advent would lead to dramatic increases in the prices of all imported goods but – contrary to Lapavitsas’s assertions – this would not generate the positive effect on domestic production one might expect. This is because, according to the World Bank, Greece imports nearly two-thirds of its energy. With a weak currency, the price of energy would skyrocket, wiping out much of the artificial boost in competitiveness.

Moreover, the incentives for those Greek companies that in the past decade have invested in countries such as Romania and Bulgaria (even for the production of foods as Greek as feta cheese) would remain unchanged – at least in the short term – due to the political and social chaos that a return to the drachma would likely generate. Meanwhile, populist politicians and authoritarian “saviours” would relish the chance that the turmoil would offer them in a country that has experienced bloody civil war.

Lapavitsas believes that, by defaulting, “the Greek people could thus regain a modicum of self-respect, savagely destroyed during the last couple of years”. But this, and the return to the drachma, would effectively freeze the country out of international money markets while also depriving it of the EU and IMF funds to which it is currently entitled. So, more new money would have to be printed to pay more unemployment benefits – after the inevitable wave of private sector bankruptcies – and public sector salaries and pensions, but the price would be high inflation.

The nationalisation of banks which would inevitably follow – because they are heavily exposed to Greek bonds – would increase the costs of the public sector, and the country’s budget deficit would dramatically worsen, thus exacerbating Greece’s main problems.

In conditions like these, how could it deal with other major issues such as tax evasion, tax avoidance and corruption? The return to the drachma would increase incentives for this kind of behaviour without improving the ability of the state to tackle them. No wonder the vast majority of Greeks (and their political parties) would rather stick with the euro. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds