Friday, January 13, 2012

Greek Crisis: A Dire Warning From Argentina and Latvia

What should Greece do -
A. Move from the Euro to a devalued Drachma and undergo a painful recession, or
B. Try to muddle along in the European Union with austerity programs and low growth with no end in sight?

According to Uri Dadush, who has analyzed the response of Argentina (A) and Latvia (B) to their debt problems, the answer appears to be A. Argentina endured a sharp, painful recession in 2002 after it defaulted and the peso devalued by 70%, but bounced back subsequently with its GDP recovering to its 2002 peak in 2.5 years. It's real GDP growth rate has been faster than Brazil's ever since.

Latvia, on the other hand, is still stuck with an uncompetitive currency and isn't projected to hit its peak 2008 GDP until 2016 at the earliest. And it's debt has continued to grow.

Dadush's conclusion: ... abandonment of the euro and default, though an extraordinarily painful course, may eventually prove to be a less costly option for Greece ... [However] what may be a less costly course for Greece may be much worse for its Euro area partners. Devaluation and default would lead to further impairment of banks, unpredictable contagion effects on other countries, and a hit below the waterline on the euro project.

Read the original article
Output Losses Are Large

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