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Viewpoint: Greece should default and abandon the euro

Jeffrey Miron
Image caption Jeffrey Miron argues that a default imposes the losses on those who profited in the good times

Jeffrey Miron, senior lecturer in economics at Harvard University, believes that the consequences of a Greek default are overstated. Not only would a default be better for Athens, it would have benefits for Europe too, he argues.

The Greek parliament has adopted new austerity measures - civil service layoffs, higher taxes, and reduced bargaining rights for unions - in the hope of generating further bailouts from the European Union.

The Greek populace responded with violent protests and strikes. It remains to be seen how the European Union will respond.

The question for Greece is whether to continue its recent path - continued attempts at austerity, which do little to tame the deficit, followed by just enough bailout from the EU to avoid default - or whether to finally admit the obvious: it should default on its sovereign debt, abandon the euro, and go its own way.

If Greece defaults, the country gets immediate relief from the crushing interest payments on its debt, leaving it with a relatively modest primary deficit which excludes the big interest payments Greece is faced with now.

In such a scenario, the pressure for austerity would therefore diminish. This would allow Greece to choose policies that encourage growth, rather than ones that shrink the deficit but retard growth by imposing higher taxes.

By abandoning the euro and adopting a properly valued currency, Greece can restore its international competitiveness. This means greater employment demand from both domestic and foreign sources.

The potential negative of default is that Greece will likely lose access, for a while, to international credit markets (although it will be a much safer investment after default than it is now).

Byzantine tax code

But being cut off from foreign lending for a few years is not a disaster; if anything, it might encourage cuts in the wasteful components of government spending.

A bigger risk of default is that ending the crisis might reduce pressure for Greece to address the economy's fundamental problems: crony capitalism, a Byzantine tax code, excessive regulation, and a bloated government sector.

If Greece fails to reform, it will suffer slow growth and a new crisis soon, regardless of what it does now.

Thus, default is no panacea for Greece, just as declaring bankruptcy is no guarantee that an indebted individual or business will return to financial health: that depends on the actions taken once default has occurred.

But default is a necessary first step that will provide Greece the breathing room to fix its economic policies in a calm, rational manner.

Many individuals, companies, and countries have recovered from bankruptcy or default.

Image caption Greece's unemployed may find jobs quicker if Athens abandons the euro, Miron believes

Overstated

For Europe's creditors, a Greek default might appear to have two negatives: the loss of future repayments, plus an increased risk of default in other countries, like Italy.

Yet those risks are easily overstated.

Substantial repayments from Greece are unlikely in the foreseeable future, or they will occur only because the rich countries give Greece the money to make the repayments.

Default risks in other countries are more readily addressed if Europe avoids throwing good money after bad, and instead retains its bailout funds for countries in difficult but salvageable shape.

And a Greek default reduces uncertainty, which is likely to facilitate rather than impede the orderly resolution of other bad debts.

For European taxpayers, a Greek default has one further benefit: it sends a message to creditors that lending carries real risks, so they should be more careful in future.

The fundamental reality is that Greece and much of Europe have borrowed and consumed too much in recent decades; someone has to pay for that.

Default accomplishes this quickly, and imposes the losses on those who made the gains when times were good. That is the right outcome.

Jeffrey Miron is senior lecturer and director of undergraduate studies at Harvard University and senior fellow at the Cato Institute. He is the author of Libertarianism, from A to Z.

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