Greece needs an exit option

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‘Grexit’ leverage could help country stay in the eurozone with better treatment

Every fan of the market knows the importance of exit. If your breakfast cereal is too bland, you can buy a different brand of cereal. If your barber charges too much, you can look for a new barber who will charge less. The option to leave is crucial, since it forces the cereal producer and the barber to try to please their customers in order to keep them.

The same logic applies to Greece’s position in the eurozone. The country’s newly elected Syriza-led government intends to press other eurozone nations for concessions that will allow it to restart its economy. The policies that the troika — the European Commission, the European Central Bank and the International Monetary Fund — has imposed on Greece since the crisis could win a Nobel Prize for economic mismanagement.

Since the prerecession peak in 2007, the Greek economy has contracted by more than 23 percent. By comparison, in the Great Depression the U.S. economy bottomed out in 1933 at 26 percent below the 1929 GDP level. However the next year the economy grew by 10 percent, and by 1936 it had already made back all the ground it lost. If Greece sustains its 2014 growth rate, it will return to its 2007 level of output just before 2050. If the United States had taken the same hit as Greece, U.S. GDP would be lower by more than $4 trillion, implying a loss of annual output of more than $13,000 per person.

The plunge in output corresponds to a plunge in employment. The overall unemployment rate is more than 25 percent, with the youth unemployment rate above 50 percent. If the United States saw a decline in employment comparable to what Greece has endured, nearly 30 million fewer people would be working.

This economic collapse has had predictable consequences for the Greek population. Formerly middle-class people can no longer afford basic health care. Many are facing the loss of their house or apartment or are already homeless. Some scavenge garbage cans for food.

This is the backdrop of Syriza’s election victory.  

Dean Baker  Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC and author, most recently, of The End of Loser Liberalism: Making Markets Progressive  Read what he thinks Syriza should do next in the rest of this article