01 Jul 2015

Laura Alfaro on Greece

Laura Alfaro

Calling for a referendum asking the Greek people to stay in the Euro might have been a good way out of the brinkmanship of the past weeks, but not after payments to the International Monetary Fund have been missed, and European funding has ended.

These tactics have created high and unnecessary uncertainty that has brought the Greek economy to a standstill. Why pay taxes? Why pay suppliers? Why pay wages? Why pay loans? With what? What does a “no” mean? What does a “yes” guarantee?

This week has been a nightmare, with no medium of exchange and banks facing growing lines of depositors who want to withdraw their euros but don’t know whether the ATM will have cash or if they will be able to withdraw their funds at a later date -- and at what exchange rate.

This happened in Brazil in the early 1990s and in Argentina in the early part of this century, when similar desperate policies were enacted. The experience in South America of bank holidays, capital controls, and default are not encouraging. There is a mistaken view that these countries fared well after these actions were taken. In fact, acommodity boom helped Argentina reignite its economy, but not before extreme hardships took their toll -- imports were extremely expensive, medicines could not be found, ordinary citizens’ income was cut by a third, vulnerable groups suffered. But more important, fifteen years later, the economy continues to decay, inflation is rampant, and many people continue to suffer.

Whatever the outcome of the Greek referendum, what’s necessary for the future is sustainable growth. The view that “monetary sovereignty” independence could be used wisely does not take into account that the type of government that has driven Greece to the edge of the cliff is not the type of government that would enact the reforms Greece needs to grow, including better tax collection, better infrastructure, and a better business climate.

Another ingredient that makes this situation so sad is that the Greek people want to be part of Europe, and Europe wants them to be part of the European Union. Unfortunately, the government’s promises that life as the Greeks have come to know it could go on as usual were out of sync with reality. Hopefully, cooler heads will prevail in the days ahead.

Laura Alfaro is the Warren Alpert Professor of Business Administration. She has focused extensively on international capital flows, foreign direct investment, and sovereign debt and served as Minister of National Planning and Economic Policy in her native Costa Rica from 2010 to 2012.

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