Greece’s government is teetering on the brink of collapse, backing away Nov. 3 from a referendum on staying with the Euro. While events continue to evolve and change rapidly, Greece is likely to default on its entire debt, says an economist at Washington University in St. Louis.
“I think Greece is likely to return to a much devalued drachma that will make its export and tourist industry competitive again,” says Costas Azariadis, PhD, the Edward Mallinckrodt Distinguished Professor in Arts & Sciences.
Azariadis, who is Greek-born, says such a move would stop the economic implosion currently taking place.
What happens next is more difficult to predict.
“Devaluations are typically a stopgap with short-lived benefits unless the country undertakes deep structural reforms,” he says. “Those are essential to foster competitiveness at home and abroad, combat corruption in the public sector, energize foreign investment and perk up the sclerotic Greek labor market, where the youth unemployment rate is already 40 percent.”
For the last two years, labor unions and professional associations have successfully vetoed all reforms, Azariadis says.
“(Prime Minister George) Papandreou failed because he was unable to overcome the veto power of special-interest groups whose constant striking has paralyzed the country for the last 18 months,” he adds.
Within the Greek socialist party, Azariadis says, there is a groundswell of support for a coalition government led by a technocrat. “However, there has been no comment from public sector labor unions, which are the source of most political contributions and wield veto power over public policy,” he says.
“Many voters seem to be in denial; they do not appear to understand that the country cannot keep consuming considerably more than it produces, or that serious reforms are needed to save the economy from imploding,” Azariadis says.
“Will the next government do a better job of confronting special interests and pushing reforms through?
“The future of Greece seems to hang on the answer,” he says.