Would leaving euro be more of a catastrophe for Greece than staying?

When it comes to the economics, the question is whether Greece would get the pain over more quickly by having control over its own affairs. Roger Bootle and Jessica Hinds at Capital Economics think that might be the case, and say Iceland’s experience after the country’s severe banking crisis in 2008 is worth looking at.

No question, Iceland had a very tough time. There were massive capital outflows from its over-extended banking sector, and its currency, the krona, depreciated by 40%. The economy contracted sharply, the IMF was called in and capital controls were introduced.

But, as Bootle and Hinds note, Iceland has bounced back. It has grown in every year since 2011 and national output is just about back to pre-crisis levels. The inflation caused by the depreciation of the krona has been tame and growth prospects are rosy.

The fall in the krona was important, since it made exports cheaper and provided a boost to tourism, where the number of visitors has risen by 60% to 800,000 a year between 2008 and 2014.

“The fall in the krona boosted net trade by enough to kick-start Iceland’s economic recovery without the need for the aggressive wage and price adjustments that have occurred in the eurozone periphery. Iceland was also able to tighten fiscal policy less aggressively than the periphery. Iceland’s fall in GDP of about 12% was around half as short as that seen in Greece since 2008.”

Bootle and Hinds say that Greece, too, would see tourism benefit from a cheaper currency, while the vast amount of unused capacity in the economy would limit the extent of the increase in inflation caused by the devaluation that would follow euro exit.

Capital controls would harm the economy, as they have in Iceland, but might be needed even if Greece stays inside the single currency. The weaker currency that would result from leaving the euro is not a get out of jail free card, far from it. But after five years of hard labour, staying in looks like a life sentence without remission.

via Would leaving euro be more of a catastrophe for Greece than staying? | Business | The Guardian.

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