China, Europe and the Netherlands: Opportunity Is Knocking at Our Doors

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036 
  Apr. 2015
T
he genie is out of the bottle: Europe is again 
discussing the possibility of Greece leaving the 
eurozone. With it, the debate has re-emerged 
regarding whether this would be helpful or not for 
Greece and whether there would be contagion to other 
euro area countries. The big questions are, of course, 
how the Greek financial system would survive an exit 
with a debt restructuring; how long it will take until 
Greece would regain access to financial markets; and 
how big the benefit of a debt restructuring is given the 
relatively low interest load. The absence of external 
help would be a further factor weighing on Greece. All 
of these factors speak clearly against an exit from the 
point of view of Greece. 
But I want to focus on the claim that Greece needs to 
exit in order to devalue so it can regain competitiveness 
and grow again. This point has again been made prom-
inently by Professor Hans-Werner Sinn of Ifo Institute 
in Munich. 
Devaluation would not help regain competitiveness
So what do the data tell us? Greece, Ireland, Portu-
gal and Spain all had very significant adjustments of 
their current accounts since 2007 from high deficits to 
close to balance or surplus. However, the composition 
of the adjustment has been very different (see chart 
below). In Ireland, Spain and Portugal, the largest part 
of the adjustment came from an increase in exports. 
All three countries have therefore managed to change 
their production structures and substantially increased 
exports. This is a desirable and healthy way of adjust-
ing, which also shows that it was not primarily a de-
mand compression that drove the external adjustment 
in these three countries. Also in Italy, the increase in 
exports was larger than the decrease in imports.
Greece stands out as an outlier in external adjust-
ment. Its adjustment was almost exclusively driven by 
a contraction in imports while exports have only very 
Why Grexit Would 
Not Help Greece
Debunking the 
Myth of Exports
By Guntram B. Wolff
An exit is unlikely to help the Greek 
economy much, as devaluation would 
not help regain its competitiveness, and 
exports would not react considerably 
to changes in wage costs due to the 
sclerotic economy.
Macro Economy 
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€
Change in the current account 2007-2014
30
25
20
15
10
5
0
-
5
-
10
-
15
Greece           Ireland           Portugal             Spain            Germany            France                 Italy
 Exports         Imports         Other Items         Current Account         Net Exports
Source: AMECO Autumn 2014 Forecast. 
Note: Nominal change in euros measured as percent of 2014 GDP.  The sign of the change in 
imports is inversed so that an increase in imports is shown as negatively affecting the current 
account.
35
30
25
20
15
10
05
0
 Q4 2007         Q2 2014 
Source: Calculated using Eurostat's quarterly national accounts dataset (labour compensation 
divided by hours worked).
Note: For Germany, Ireland, Italy and Portugal Q1 2014 data is used instead of Q2 2014 
since the latter is not available.
recently been positive.
This raises the question of what is hampering export 
performance in Greece. Are high wages or the absence 
of a real depreciation the main drivers of the different 
adjustment experience of Greece compared to the 
other euro area countries? The following graph shows 
wages measured in euros in the private sector. As we 
can see, hourly wages have come down substantially in 
Greece and are in fact the lowest in the euro area ex-
cept Latvia and Lithuania (not included in the graph). 
This contrasts with the experience in the other three 
programme countries (Ireland, Portugal and Spain), 
where hourly wages in the private sector have, despite 
the adjustment efforts, increased. 
Correlating the change in exports with the change 
in wages in the private sector shows that Greece is an 
outlier. Notwithstanding a dramatic drop in nominal 
wage growth over the period from 2007 to 2014, export 
performance remained weak, and did not pick up as we 
have seen in other countries.  The following scatter plot 
illustrates further that Greece is a clear outlier, as are 
Lithuania and Slovakia.
Overall, I conclude that the Greek economy would 
not benefit as much as hoped for from a rapid depre-
ciation. The reasons for the weak Greek export per-
formance might primarily lie, among other factors, in 
rigid product markets, a political system that prevents 
real change and guarantees the benefits of the few; as 
well as a lack of meritocracy, nicely outlined by Brook-
ings scholar Pelagidis. To the extent that the Troika 
can help reform the country, an exit of Greece from the 
euro would even be counterproductive.
This does not mean that the current debt trajectory 
and debt level is sustainable. It may be necessary to 
further alleviate the debt burden on Greece, especially 
if inflation remains low and growth is weaker than the 
Troika expects it to be. Such debt relief measures have 
been done a number of times before by the official 
creditors and, looking ahead, further measures to alle-
viate the Greek debt burdens without incurring losses 
08
06
21
09
14
16
22
25
25
29
13
15
20
08
Private Sector: Hourly Labor Compensation (EUR)
Greece            Ireland             Portugal            Spain              Germany            France                Italy
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