Samuel Brittan on the Greek crisis

FT columnist Samuel Brittan explains why he would have voted no in a Greek referendum. (The bailout package does not address the need to restore competitiveness by reducing the country’s high domestic prices and wages.)

What is missing from the discussion is the role of adjustment. By adjustment, I mean correcting what is fundamentally wrong in a country’s international position. If a country is not paying its way internationally, it needs to sell more and/or buy less from its trading partners – or to attract more long-term physical investment from them. For a country in the happy position of being outside a misconceived arrangement such as the eurozone, adjustment might be helped by devaluation. Exchange rate changes often need to be backed by domestic retrenchment. But to rely on that alone is a form of sadomasochism.

…. The Greeks are being told by international institutions and creditor countries to squeeze, squeeze and squeeze again. I know how I would have voted in a Greek referendum on the package, were it to have gone ahead. ….

Financing has its place in a reasonable economic policy. The Bretton Woods agreement of 1944 provided for international financing for a country in payments difficulties. But if the difficulties proved long-lasting an exchange rate adjustment was not merely permitted, but required. John Maynard Keynes, in commending this agreement, said that never again would deflationary policies be forced on such countries. How wrong he was. Now such policies are insisted upon as the main adjustment mechanism. Yet they may even fail in their own terms, because negative economic growth will adversely affect national budgets.

Samuel Brittan, “Why I would have voted no in a Greek referendum“, Financial Times, 4 November 2011.

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