Dani Rodrik in the Room for Debate at the NY Times:
Get It Over With, by Dani Rodrik: When Argentina defaulted on its debt a decade ago, the country became a pariah in the eyes of foreign bankers and bondholders and was shut off from international financial markets. Yet its economy recovered quickly and experienced rapid growth thanks to a large boost in external competitiveness provided by a vastly depreciated currency. The lesson is that default can be the better option when the alternative is years of continued austerity.
In the case of Greece, this scenario is greatly complicated by the country’s membership in the euro zone. Greece would have to exit the euro zone to be able to engineer a currency depreciation. Since this is something for which euro zone rules do not make any allowance, a unilateral exit will unleash huge uncertainty about the rules of the game. And a Greek default will almost certainly be considered a hostile act by Greece’s European partners – never mind that German and other euro zone banks were equally at fault for having over-lent to the Greek government.
Unfortunately, the current strategy seems destined to force Greece to this outcome. It is predicated on protecting German and other European creditors and bondholders while Greek workers, retirees and taxpayer pay the bill. This makes no sense economically, and will not work politically.
One way or another, Germany, France and other euro zone creditor countries are on the hook. If Greece eventually defaults, they will have to pay for their banks’ mistakes. It would be far better for them -- and for the future of the euro zone -- if this reality were recognized quickly. A coordinated, agreed-upon reworking of the rules will not be easy. But it will do less damage than insisting on politically unsustainable levels of austerity and having default and exit from the euro zone forced on the Greek government by protests on the streets.