Greece – GREXIT = Export Miracle …err, hang on…

So nobody knows what is going on in Greece. Tspiras seems willing, as he has done all along, to compromise. Meanwhile, Dr Schaubel, which is German for “hell, no”, seems to as willing to be as uncompromising as possible, in between lecturing the ECB

If Greece does GREXIT, which is not certain, this will result in a depreciation of the currency by up to 50% some reckon. And here is the rub. Greece is critically dependent on certain things which will get expensive, while its exports (in trade) are not that large nor perhaps that amenable to rapid rampup in the face of increased demand concomitant on falling prices, or are indeed priced in non Euro currencies anyhow. While tourism and services help, Greece runs a massive CA deficit. The logic of GREXIT is that somehow not only will debt disappear (only if they default in tandem will that happen) but that exports will boom. Well, maybe.

This whole thing has been grossly mishandled, and while the Greeks have a bunch of blame, the TROIKA must take the lions share. If they are, as Lagarde said, the “adults” then its time to start behaving like it.

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7 thoughts on “Greece – GREXIT = Export Miracle …err, hang on…

  1. Brad Ball

    Brian, just to be clear, when you say “a depreciation of the currency by up to 50%”, do you mean by reference to the agreed rate at which the Drachma entered the Euro or what is your 50% benchmarked against?

    Reply
      1. Brad Ball

        Yes, that’s what I’ve seen also, but I don’t really get what that means! The only reference point by which I can figure out what the 50% depreciation would be against is the rate at which the Drachma entered the Euro 15 years ago, but I can’t really see how relevant that is going to be because the Euro itself has had massive fluctuations against other majors, such as the Dollar, Yen and Sterling. We really are getting into surreal territory!

    1. drplokta

      The 50% depreciation can only be against the exchange rate on day 1 of the switch to the drachma, when everyone in Greece is forced to change their euro bank deposits into New Drachma at an agreed official rate. The exchange rate will then immediately fall by 50% so that those bank deposits lose half of their value, when measured in euros. The problem is that Greece mostly can’t redenominate its external debt, so that will stay in euros.

      Reply
      1. Conor Foley

        Who is going to determine the “agreed official rate” or, more importantly, how will it be determined? What would be the point in beginning with an exchange rate that everyone knows is completely overvalued? Why not start with the rate at which you would expect equilibrium to prevail and let market forces take effect after that? I believe the starting point for the New Drachma can only be the entry point at which it joined the Euro and the 50% (or whatever) depreciation takes place the second the market opens. I can’t see any other way (or point) in coming up with an arbitrary official rate.

  2. Pingback: Schauble, a modern Procustes. | Brian M. Lucey

  3. Danny A

    Looking at employment rates in Greece and I would say what it needs more than anything is jobs, so that it can live *to* it’s means. If Grexit can be used to facilitate job creation by increased internal spending (hence economic activity) in the new currency then it would ultimately be a positive move.

    Reply

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