European leaders fear disaster if they allow the Greek government to renege on its debt and drop the euro. But that outcome may not be as bad as it seems. The experience of Russia suggests that what looks like catastrophe before the event can be something very different after it. After three years of crisis, rising unemployment and falling living standards in Greece and other strapped nations, the European Union and the International Monetary Fund are demanding more austerity in return for emergency loans. The logic: The pain wrought by a default and an exit from the euro would be so catastrophic that it is better to force governments to slash spending in the depths of a recession.
Neither austerity nor loans, though, are likely to solve the fundamental problem. For Greece -- as for Portugal, Ireland and Spain -- the value of the euro against other currencies is too high. As a result, their economies aren’t competitive, making it difficult for them to generate enough money to pay their debts. Meanwhile, the burden of interest payments renders them unable to stimulate the economic growth that could make their obligations more manageable.
Greece’s predicament is familiar to many governments in emerging markets, and particularly to Russia. Back in the mid- 1990s, Russia anchored its currency to the dollar, a move with similar economics to joining a monetary union. Inflation slowed and interest rates fell, but Russia quickly developed a competitiveness disadvantage. The ruble’s strong value against the dollar made Russia uncompetitive. Imports replaced domestic production, and the economy was unable to generate growth. Investors lost faith in Russia’s creditworthiness, pushing borrowing costs higher.
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