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March 9, 2017

Greek debt crisis: Why Grexit is not an option

By MarketLine

Undoing the fatal mistake of relying on an overvalued currency does not correct matters.

The no alternatives case for the Greek economy on staying in the single currency union is easy to realise after having a close look at its macroeconomic figures that reflect something of an economic collapse.

In fact, the heavy reliance of the Greek economy on services and at the same time its lack of a national productive base rule out the possibility of achieving growth through the adoption of a devalued national currency.

Accordingly, even a write-off of the largest part of the Greek debt would not be able to stimulate the economy in the case that this haircut includes the adoption of a national currency.

That is because economic growth can only be enhanced when the economy stands on its own feet. In other words, a competitive production base is a precondition for monetary policy, not vice versa.

Unfortunately, the Greek economy is too vulnerable to sustain the shock of steep adjustment to a national currency.

Such a choice could only extend inequality and devastate the economy for the long term because of the economic isolation it would bring about.

This piece previously appeared on MarketLine as a blog. You can read the original here

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