Lea Jakobiak
On the eve of a keynote speech by the ECB President, Mario Draghi, one leading economist doesn't hold back in the way he believes the Bank has dealt with the eurozone's faltering recovery.
Article / 19 November 2012 at 23:01 GMT

Greek Eurozone exit in 6 months after Europe goes to worse place

Steen Jakobsen Steen Jakobsen
Chief Economist & CIO / Saxo Bank

Greece is in the midst of a negative compounding story and the only relief in sight is a short to medium term break from the Eurozone within about six months’ time, says Steen Jakobsen, Chief Economist Saxo Bank.

“Although I want Greece to have all the best things in the world I think ultimately it will need to do something which is outside the box,” says Steen.

He believes an exit from the Eurozone within six months is a very likely scenario considering Europe’s desire to try to keep Greece alive for some time yet, particularly ahead of the upcoming German election. Until then Steen sees Europe going through some rough patches before a recovery begins in 2013.

A worst place is ahead for Europe
“The first quarter of next year will be the worst quarter of the debt crisis in terms of growth and the amount of headwind to austerity and the lack of ability to move to a mandate for change,” says Steen. “We will see recovery inside the next four quarters in Europe but we need to go to a worse place first.”

Disintegration and desperation
The main problem for Greece is that none of the promised austerity measures have been implemented. And with no one willing to give up their entitlements this has created a negative compounding story where everything disintegrates and gets worse month by month as seen by the recent social tensions.

Meanwhile, the rest of Europe is so desperate for Greece to continue as if nothing has happened and so it is very likely that within the week Greece will be paid its next tranche of financial aid in order to stay afloat, says Steen.


mikeblack mikeblack
The implementation of the austerity measures has started and a ride around Athens or Thessaloniki will confirm that. Salaries and pensions have decreased dramatically over the last 2 years unfortunately without any real result. Not sure if a euro exit could help but among the desperate measures it might be the best.
Yvette Roper Yvette Roper
Thanks Mike for your insight on the Greek situation. Because you are a Greek national your input really adds value to the community. As the Greek situation develops (worsens) please keep commenting on
Juhani Huopainen Juhani Huopainen
Internal devaluations never work - without extraordinary circumstances. This has been stated by German IFO Institute, Krugman or basically any empiricist. But this conclusion is not getting through to Europe's crreditor countries because they cannot stomach the losses and politicians hold the euro sacred.
Mariani Carlo Mariani Carlo
can you explain to me, if Greece leave euro where the economy should benefit . Rich people can buy some island for nothing and then what changes?
Juhani Huopainen Juhani Huopainen
Mariani, two ways: 1) the real value of nominal debts (household, government, corporations) becomes smaller in terms of outside currency, but stays the same for the Greek. Also asset prices are now priced in a devalued currency: the Greek houses and companies would be more attractively priced from the foreigner's point of view, and their price would go up. All the legally binding Greek costs (pensions, salaries etc) would also become cheaper in terms of foreign currency. Leaving the euro and letting the drachma (or whatever it would would be) devalue by say 30%, would in effect be similar to a wage cut of 30%, but without killing all the households that have debt. FX devaluations have been done about a hundred times in the past in different countries at different times and it has always worked. Internal devaluations have been tried about hundred times as well, but they have never worked.
Juhani Huopainen Juhani Huopainen
some more: IFO Greece’s exit from EMU: historical experience, macroeconomic implications and organisational implementation

Krugman: Internal Devaluation, Inflation, and the Euro

The Economist: To work, internal devaluation requires higher inflation in eurozone
mikeblack mikeblack
I agree with Juhani, Not to mention the export opportunities even if Greece was never a big exporting power. However, a period of one year or even more will be devastating and subject to social unrest. And there exactly lies the question: Does Greece want a sudden shocking change or a slow and painful continuation of the ineffective and unfair measures?
Mariani Carlo Mariani Carlo
I agree with you but what about the restructuring process of the entire economy? The public administration need a restructuring phase and the country need to attract capital in a stable situation. I saw the italian experience and a lot of devaluation. Italy is not now competitive and then growth outlook is week. The problem is not the euro, but is more complicated . TKS
Juhani Huopainen Juhani Huopainen
Euro IS definitely the problem, but that does not mean there isn't a lot of other issues as well. Hard enough economical restructurings happen only at gunpoint. Coming from Finland I'm well-aware of the havoc deep devaluations and high levels of debt can play on economy - in the early nineties the drop here was the largest of any OECD country after the WWII.


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