Here is a good article on Korea and other near-defaulters or defaulters, and what lessons they might have Greece now. Greece can in fact recover if it leaves the euro, and increasingly, I think both it will and it should. However, one important element Greece should not pass up, is using the crisis to force discipline on the parts of the economy that caused the currency run to begin with. The Korean government was partially able to discipline the out-of-control chaebol who had caused the crisis by wildly over-borrowing on Wall Street in the mid-90s. Koreans hate to hear it, but their political economy got substantially cleaner and less corrupt because of the 1997 brush with default. Greece should do the same; it should not leave the euro just so it can go back to its bad old ways. That would be a catastrophe and turn Greece into a prototypical Middle Eastern patronage state.
Last year, I bet my IPE students that Greece would be out of the Euro by the end of 2012. Increasingly I can’t even imagine how Greece will survive if it doesn’t leave. Not only will austerity cause punishing deflation for years, maybe a decade, to restore competiveness, the withdrawal of government spending will almost certainly cause a semi-permanent recession, as there is no other source of demand in the Greek economy now. So Greece gets locked into a downward spiral: huge uncertainty is caused by all the turmoil, so consumers stop spending to hedge the less certain future; the government can’t spend because it’s already wildly indebted and can’t inflate because it’s in the euro; crashing demand in the system feeds through into terrible unemployment (because if no one is buying anything, no one is needed to go to work) and other social stresses, thereby encouraging people to save (and not spend) even more as a hedge against yet further uncertainty. And the cycle goes on. Without a huge, countercyclic influx of outside money (i.e., the much unloved German bailout), it’s hard to see a way out within the euro. Worse, constant economic chaos like this eventually leads to political chaos on the streets; hence that nut-case neo-Nazi party that just got 8% in the Greek elections and wants to put landmines on the border with Albania.
The ideal way to get Greece and the other southern states out of this is to work out their imbalances with the northern states in the ‘natural’ or market way. Northern demand for southern products would rise, while southerners would clamp down to work hard meeting that demand and so generating the revenue needed to climb out of their hole. In other words, the Germans should go on a huge spending spree, buying lots of southern imports like Italian wines and Greek vacations. Korea did this after 1997; it exported its way out of its debt, as did Mexico after 94. (The article is good on this, btw.) No one seems to mention this much in the Greece debate though – German and northern niggardliness on importing makes it all but impossible for these countries to work off their debts. If the Germans don’t buy anything from Greece, how are the Greeks to pay them back? Rising German spending would make all of this so much easier.
More generally, this is the big problem with the global economy as a whole – nobody is buying anything: low demand –> low supply –> unemployment. In the pre-Great Recession days, the US was the motor of global demand. We bought everything at Walmart; we couldn’t have enough plasma TVs, home redecorations, and metrosexuals telling us we needed 8 hair gels. Obama called us the ‘importer of last resort.’ So today, at the global level, what the world really needs is someone else to fill that role for awhile, Specifically, surplus-obsessed mercantilists like Germany, China, Japan, and, yes, Korea, need go a on huge trip to the global mall, buying everything in sight, wearing down their reserves to fire global growth through higher demand and hence employment. The old importers, like the US, Spain, Britain, and Greece most obviously, are just tapped out. But Asian states, like Germany in the EU, are obsessed with a current account surplus, and refuse to help (i.e., shop) even when it’s painfully obvious to everyone that world needs rebalancing, and when it would very obviously benefit German and Asian consumers (because they could buy cheap imports). I find this so annoying; we wouldn’t need all these Keynesian hijinks of quantitative easing if China would just import for awhile…
I’ve written a lot about this before here.