In all the flood of commentary about Greece there is one particular argument largely made by neo Keynesian economists that repeatedly raises its head. This is that if Greece were to default on its debts and leave the euro then its economy having been liberated from the straitjacket of a fixed exchange rate and the weight of its debts could recover in the same way that Argentina did when Argentina found itself in a similiar position ten years ago.
This argument simply fails to take into account the totally different economies of Argentina and Greece. Argentina is a resource rich country, self sufficient in food with a large trade surplus. Greece is a resource poor country that imports most of its food and which has a large trade deficit. Following its default Argentina could pay for such imports as it needed out of the profits of its exports. Greece is not in a position to do this since it does not have the necessary exports. Talk of the Greek economy recovering competitiveness is misplaced. Unlike Argentina Greece is a minor agricultural producer, which cannot hope to match the economies of scale of other big Mediterranean agricultural producers such as Spain, Italy or Turkey. Such industries as Greece once had have largely closed following Greece’s EU entry due to their inability to compete head on with the industries of Greece’s much larger and stronger EU partners. This means that whilst Argentina still has a significant industrial base that was able to benefit from a currency devaluation to step up exports Greece does not. Greece is a major tourist destination and tourism is Greece’s main foreign currency earner but it is difficult to see how this could be increased quickly enough or to a big enough extent to cover Greece’s deficit. Nor in the case of a default and euro exit would Greece be in a position to do what the US and Britain do, which is pay for imports in its own currency. Unlike the dollar and sterling confidence in any new drachma would be so low that it is difficult to imagine anyone wanting to hold it.
It is in fact difficult to see how in the event of a default and euro exit the Greek economy could continue to function without further loans from the EU. Without such loans I for one cannot see how Greece would be able to pay even for essential imports. In the absence of such loans there would it seems to me be a serious risk of an implosion of the sort experienced in the 1990s by Cuba and North Korea. In order to avoid such a possibility such loans would presumably be made but if so this would merely emphasise the fact that unlike Argentina and despite what some neo Keynesians say Greece is simply not in a position to stand on its own feet.