Today, Wednesday, was an interesting day for economic news. On the bright side, the OECD has upped its growth forecasts for the US and Europe. On the downside, though, the latest numbers from the US Department of Commerce suggests that the manufacturing sector is easing. Meanwhile, Greece’s EU Commissioner stated what many people have long been thinking: maybe Greece really shouldn’t be using the euro.
The OECD forecast of 2.6% growth in the US is just a touch slower than that forecast by the IMF (2.8%). But, as I mentioned in Making Expectations More Realistic, a difference of 0.2 percentage points really doesn’t matter, particularly when we are staring down growth rates that are likely too slow to spur the job creation that is necessary to make a large dent in the number of unemployed and underemployed. With that in mind, the key question facing policymakers is not just how to sustain an economic recovery, but how to enhance the recovery so that it produces enough jobs.
That leads us to Greece. There are many benefits to the country being part of the EU. But, it may be in the best interest of Greece and the larger, stronger economies of the euro zone if Greece ditches the euro and goes back to using the drachma. Then, Greece could devalue its currency. (Of course, just the shift of Greece to using its own currency could lead to massive selling and devaluation.) On the downside, that could ignite inflation. A devaluation would also make external debt more expensive and could thrust Greece closer to default. On the positive side, it would make foreign goods relatively more expensive and Greece’s exports relatively cheaper, helping to reduce domestic consumption while boosting its export sector, and that should help to correct some of the imbalances that have led to its current state. As long as Greece continues to use the euro, it does not have the ability to devalue its currency to boost growth, without other eurozone countries being affected. And as long as Germany, a much larger economy, is concerned about inflation, it is unlikely that the ECB will lower interest rates. If the market continues to put downward pressure on the euro, the ECB could potentially raise interest rates to support the currency. Unfortunately, that could also derail Europe’s recovery and place additional pressure on Greece.
Addressing fiscal imbalances is a little like dieting. Generally speaking, a morbidly obese person did not just wake up one day and find themselves overweight. It happened over a long period of time. Similarly, the weight does not just come off over night. That takes time and much sacrifice, in terms of dieting and exercise, to resolve the weight issue. A massive budget deficit and large national did not just appear overnight and it will not go away overnight. It will take a period of time, involving considerable sacrifice, to resolve.
I’m not sure what is the best policy to help Greece out of its current funk. However, it is likely that Greece’s options are more constrained as long as it uses the euro, than if it went on its own. Greece’s neighbors might even thank it.