Dani Rodrik explains why a Greek euro exit isn’t a solution for anyone

Turkish economist Dani Rodrik, formerly a professor at Harvard and currently an Albert O. Hirschman professor of social sciences at the Institute for Advanced Study in Princeton, New Jersey, has coined the phrase “the inescapable trilemma of the world economy.”

According to this theory, “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three but never have all three simultaneously and in full.”

The theory appears to perfectly suit the current eurozone debt crisis.

On the occasion of his interesting take on Greece in a recent piece he did for Project Syndicate, Rodrik responded to some written questions from Kathimerini.

The official government response to the German request to “show us the alternative sources of revenue” is: “People are more than numbers.” As an economist, what do you make of such statements? Do you think that the deadlock is caused by a cultural clash between Greece and Germany?

It seems to me that the Greek government is trying to leverage its position by trying to appeal to the broader European public over the heads of the troika: it seems to be saying “we are the legitimate elected government of Greece, people have voted for us, you have to listen to democracy’s voice, otherwise you too can be one day the victim of misrule by heartless technocrats.” The German government is naturally uncomfortable about what they see as political grandstanding. For me as an economist, SYRIZA’s attitude makes perfect sense, but it also needs to be backed up by a credible economic program obviously.

In your Project Syndicate article you suggest that the Grexit threat on behalf of Greece is only implicit. How about a Grexit by accident? How plausible is that scenario and what could Athens and the eurozone do against it?

I really don’t think anyone wants Greece to exit. That does not mean that what happens if Greece were to leave is irrelevant. The likely consequences of Grexit shapes the bargaining that is taking place; it affects in particular the bargaining power of each side.

The likelihood of an accident through miscalculation is always possible. But I don’t quite see how Grexit could happen by accident. There is no mechanism that could force Greece to leave the euro or produce that result by default. The Greek government would have to make an explicit decision to reintroduce the drachma and that would be a conscious decision, not an accident.

You also imply that the consequences of a Grexit for the eurozone are manageable. Some of your colleagues have expressed different views about the costs. Could you please explain why you seem to share the opinion that contagion risk is minimal?

I didn’t say that the consequences of Grexit are manageable. I said some people evidently think so. For my part, I think the consequences could be immeasurably costly. It is one of these things for which we cannot calculate the risks ex ante. Given the uncertainty and the potentially catastrophic costs of contagion, it should be the last thing that [German Chancellor] Angela Merkel wants.

According to your article, a return to the drachma would not benefit Greece, since an internal depreciation would not have any effect on the export sector. Have you examined the double currency solution both Tomas Maier and Wolfgang Munchau propose?

The double currency option is an interesting idea that would allow the Greek government some fiscal breathing space and relax some of the austerity at the margin. What it does not do is address Greece’s competitiveness problem.

An increase in competitiveness is required both to ensure a recovery in domestic spending does not spillover into imports excessively and to give employment and output a boost through a rise in exports. So, as I explain in my piece, figuring out the bottlenecks that stand in the way of Greek exporters is crucially important. What we know is that a reduction in Greek private sector wages has not done enough to stimulate exports.

Do you think Greece is a special case, a eurozone misfit that shouldn’t have been allowed in the bloc in the first place? Do you see any chance of a compromise between the new Greek government and the current european regime?

The problem is a much bigger one than just Greece, though perhaps Greece has been the weakest link because of the populist policies of past governments. The fundamental problem is that a currency union among democracies requires significant convergence in social-economic models of the participating countries. I am not sure even France and Germany could last in the eurozone together in the long run without harmonization of their labor-market, welfare-state and tax regimes.

The model to think of is the United States. There are some differences across northern and southern states, for example, with respect to minimum wages or union rules, but these are relatively small – much smaller than what we have currently in the eurozone.