Policy Debate Economists to Greece: Just Say ‘No’

Alexis Tsipras isn’t the only one calling for a “no” in Sunday’s referendum. The leftist leader is backed by some famous economists. While still in the minority, a growing number believe Greece would be better off outside the euro.
Clockwise from top right: Hans-Werner Sinn, Thomas Mayer, Paul Krugman, Joseph Stiglitz, Dennis Snower, Philippe Legrain.


Paul Krugman, the Nobel Prize-winning U.S. economist, and Hans-Werner Sinn, Germany's most notable economist, don't have much in common when it comes to economic philosophy and solving the major challenges facing the globe.

Mr. Krugman, a policy standard-bearer of the U.S. left, typically favors public spending to fire up stagnant economies, and has persistently called on Germany to loosen up and spend more to help its European brethren.

Hans-Werner Sinn, the head of Munich’s Ifo Institute, is the poster child of Germany's conservative right, a supporter of tough-love austerity and fiscal controls, who tends to see economic pump-priming as wasteful and ineffective.

But the two economists, perhaps surprisingly, actually agree on one thing: Greece would probably be better off voting “no” in its referendum on Sunday – even if that means becoming the first country to exit the 15-year-old euro currency bloc.

The two men aren’t the only economists calling for “Grexit” on Sunday, when voters will decide on an aid package from creditors that promises more austerity and painful reforms to pensions, labor markets and state-owned businesses.

It’s a package European leaders argue is best for the Greek economy and for Europe, and they warn that a “no” vote would effectively force Greece to leave the 19-nation zone they have belonged to since 2002.

Prime Minister Alexis Tsipras is asking his countrymen to reject the offer, which he says would condemn Greeks to years if not decades of economic servitude. Let's call the lenders's bluff, he urges. If it's just a bluff, that is.

I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Paul Krugmann, Nobel Prize winning economist

German Chancellor Angela Merkel, U.S. President Barack Obama and Mr. Tsipras all insist they want Greece to remain in the currency. But increasingly, economists on both ends of the ideological spectrum are calling on Greeks to cut their losses.

That sentiment -- still believed to represent the minority of economic thought -- has grown louder this week as the crisis moves to perhaps its conclusion.

For these economists, including some like Mr. Sinn in Germany, “Grexit” makes economic sense. Lenders must abandon their unrealistic demands, they argue, that Greece dutifully pay down its massive debt and reform its economy into oblivion.

Faced with those choices, they say, Greece would be better off on its own.

While these economists agree on what Greece should do, they diverge widely on how the country got to its current woeful state -- and who's to blame.

From the conservative German perspective, Greece is a failed state in the euro that simply has no chance of meeting the (perfectly valid) reform demands that have been placed upon it by its European partners over the past five years and counting. In short, Europe is better off cutting its losses and seeing if Greece can sink or swim on its own.

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“The fear of a Grexit is unjustified. While bankruptcy is sparking fears of chaos, an exit would actually offer the chance to overcome the crisis,” Hans-Werner Sinn wrote in an editorial for Handelsblatt this week.

Hans-Werner Sinn, who leads the Munich-based economic think-tank Ifo, is a long-time advocate of Greece leaving the euro currency zone. Since 2012 he has suggested that allowing Greece to start printing its own national currency again is the only way the country can get back on its feet – the devaluation that comes with the exit would help its economy bounce back within two years, he argues.

Mr. Sinn’s arguments were largely ignored in 2012 when many feared a “Grexit” could collapse the entire euro zone bloc, causing market speculators to drive out other troubled economies from the euro sphere.

Those concerns have lessened, with many anticipating that the euro zone can protect vulnerable members such as Portugal and Spain.

The fact that European markets shrugged off this week’s turmoil is seen as a sign of optimism that the future of Europe’s currency project is not at stake on Sunday.

Mr. Sinn puts blame for Greece's problems squarely on Greece and its profligate political leaders, but Mr. Krugman and his supporters say Europe is mostly to blame for the country's current tenuous footing.

In their argument, Greece has effectively been blackmailed by its European and international creditors such as the International Monetary Fund, who have imposed reforms on Greece that no self-respecting country should ever have been forced to implement. Those measures have driven Greece's economy into the ground. Just end the madness and leave the euro, they advise Greece.

“I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that?“ asked Mr. Krugman in an editorial this week in The New York Times.

Mr. Krugman’s “No” camp also includes Joseph Stiglitz, another Nobel prize winner who has long advocated that Europe needs to loosen its stranglehold on Greece, and Philippe Legrain, a former advisor to the European Commission who called on Greeks to reject the “blackmail” of creditors in Foreign Policy magazine this week.

Mr. Stiglitz, in an editorial that appeared in Handelsblatt and a number of English publications, argued a "No'' vote would give Greece “the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present."

Whether you agree with Mr. Sinn or Mr. Krugman over who is to blame, the point these economists make is the same: The gap between what Europe is demanding and what Greece can pull off is simply far too wide.

No amount of negotiation between Greece and its international creditors will ever lead to a viable deal that enables Greece to emerge from its economic malaise as a healthy member of the euro.

Instead, they argue, it’s time to try a new approach.

“If you look at it in economic terms, I still think they would be better off inside." Carsten Brzeski, ING-DIBA senior economist

Thomas Mayer, Deutsche Bank’s former chief economist who has been advocating that Greece introduce a parallel currency since 2012, told Handelsblatt he sees a way for Greece to keep the euro as a sort of “foreign currency.”

He cited the example of the Balkan country of Montenegro, which uses euros as cash but is not part of the currency bloc. Its central bank and government make their own decisions rather than relying on the ECB or Brussels.

Montenegro “uses the euro without being a member of the monetary union. The banks there survive even without refinancing through the ECB,” Mr. Mayer said.

While this option, too, might cost the rest of Europe if Greece defaults on its loans and debts to the European Central Bank, it might be the best option left, he argued.

Mr. Sinn and Mr. Stiglitz both point to Argentina as an example of a country that, while it has struggled mightily with economic declines and currency devaluations, eventually managed to emerge on the other side of a government default.

Others like Denis Snower, an American economist who heads the Kiel Institute for the World Economy in northern Germany, are on the fence, though even Mr. Snower has shifted somewhat.

In an editorial this week, he argued that, while the “more desirable option” remains to keep Greece in the euro, a Grexit could also offer opportunities for the rest of the euro zone to rally around its remaining 18 members and pass tough reforms to keep the common currency together.

So who is left advocating for Greece staying in the euro zone? While their numbers are dwindling, most observers still believe a Grexit is a wrongheaded idea, one fraught with uncertainty that will lead to an outright collapse of Greece’s economy.

A poll this week by the German research group Sentix found that 65 percent of market watchers in Germany and Europe would vote “Yes” on Sunday if they had the choice.

Those advocating against a Grexit include top German economists such as Holger Schmieding of Berenberg Bank and Volcker Wieland, an economic advisor to the German government.

“A Grexit is not automatic, and can and should still be prevented, because it would worsen the crisis once more,” argued Marcel Fratscher, head of the Berlin-based DIW economics institute, in an editorial for Handelsblatt this week.

That doesn’t mean that they will get what they asked for – the same Sentix market poll found that 51 percent now expect Greece to leave the common currency. Politics, it seems, could well trump economic sense.

“If you look at it in economic terms, I still think they would be better off inside,” Carsten Brzeski, a senior economist based in Frankfurt for the German-Dutch bank ING-Diba, told Handelsblatt Global Edition, though he said it remains entirely open whether a political deal will actually be reached.

Mr. Brzeski said he believes a plan for Greece to stay in the euro zone – and pull out of its economic morass of the last five years – remains possible. It involves “a decent [structural] reform proposal combined with European support. This is not about blackmailing but could be … a pro-growth oriented reform agenda.”

“I think that is a much better road for Greece than exiting” the euro, he added.

Whatever the outcome this week, Mr. Brzeski said key is that whatever is agreed is lasting: Either Greece leaves, or everyone commits once and for all to back a reform proposal and actually follow through with it over the next five years.

That’s a sentiment every economist can probably agree with.


Christopher Cermak is an editor with the Handelsblatt Global Edition in Berlin, who has covered the financial crisis in Europe and from Washington DC. Jan Mallien and Frank Wiebe of Handelsblatt contributed to this story. To contact the author: [email protected]