Ever since the Greek crisis kicked off an eternity ago, people have proposed a return to the drachma. The new currency would fall sharply against the euro, giving Greece’s competitiveness a boost by making exports cheaper. Higher exports should galvanise overall production and employment in the economy, giving growth a potentially hefty fillip.
Sounds great, says Oliver Kamm in The Times. But it’s unlikely to work that way. Greece’s export sector is relatively small, for one thing. Devaluation also makes imports more expensive, reducing real wages, and you need a flexible labour market to ensure that the boost to competitiveness isn’t then nullified by a rise in domestic wages. Greece doesn’t have one. There is also little scope for consumers to switch to domestic goods when foreign goods become pricier; Greece imports essentials, such as food and energy. So a wage-price spiral is all the more likely. Nor are its main trading partners growing quickly, a key reason for previous successful devaluations, as Jim Leaviss points out on bondvigilantes.com.
“The immediate economic impact of dropping out of the eurozone would no doubt be more misery,” as economist.com’s Gulliver blog agrees. But the return of the drachma might give key industries a lift over the longer term. The tourism sector, for instance, accounts for 16.3% of GDP, including domestic knock-on effects, and this figure is expected to climb to almost 20% in 2024. Assuming the industry “can hold on for a few years”, there could be a brighter future ahead.