A Careful Look at Greece's Options and Why Yes Is the Only One

Paul Krugman and Joe Stiglitz have vociferously advocated voting no in the Greek referendum. Their main argument is based on the effect of austerity on the Greek economy and on the possibilities open to Greece following a refusal of the current deal. Indeed, they imply, that once free from the rigors of EU fiscal controls Greece and able to at last devalue Greece will be capable of reinventing itself and solve its woes.

First, lest there is any doubt in anyone's mind, both Krugman and Stiglitz see the no vote not so much as a negotiating tactic, but as the first step out of the Eurozone. So let us abandon the pretense that this is merely a way to strengthen the government's negotiating position. The argument then has to be about the merits of leaving the Euro or not.

Before entering that discussion let me first be clear: Most Greek economists, myself included, who are advocating a yes were not happy with the way the bailouts were organized. They were clearly the result of a messy compromise reflecting the internal politics of the Eurozone. I, for one, would have desired a slower process of fiscal adjustment and debt restructuring as a response to implementation of reforms. This does not mean that Greece must now turn its back to Europe

Understanding the consequences of leaving the Euro has to be analyzed in two separate parts: first the consequences during the transition to the drachma and second the long-term outlook for the Greek economy with its own currency.

The transition is, of course, hugely important. Contrary to what Krugman believes, the worst of that transition has not already happened. First, it is important to remember that until January, before the new government took over, Greece had started growing, unemployment was in decline and had even managed to access the credit markets.

If Greece votes no, the most likely outcome will be a breakdown of negotiations with the Eurozone, simply because a significantly better deal will not be approved by the parliaments in many of the Eurozone countries -- it is not consistent with their mandates. With no deal the banks will not receive any liquidity assistance and will not be able to open to the public. Since trading in the real economy will collapse, the government, with no revenues to speak of, will be forced to print a parallel currency to run the state (police, hospitals, public sector etc.).

First, this is illegal under Eurozone rules and secondly bad money drives out good. So this will effectively mean Grexit. Deposits will be redenominated in the new currency and will lose at least half their value in the ensuing devaluation of the parallel currency. Inflation will follow and the resulting purchasing power and wealth will be decimated. This will lead to an austerity not even imagined on the basis of what happened in the last five years or what is to come if we vote YES. So Krugman is wrong in reassuring us that the worst has already come. This is an irresponsible statement not backed up by any evidence.

In the longer-run Greece will stabilize at a much lower level of wealth than before. With the absence of any outside discipline it will maintain the statist and clientelist economy it has lived with for years. Just look at the legislative initiatives since February in rehiring public sector workers, in dismantling recent education reforms and of course the huge amount of nepotistic appointments that surpass anything we have seen before. The point is not that the Greek public sector is much larger than others in the EU, but that it is totally ineffective. This combined with numerous regulations prevents Greece from being productive. No amount of devaluation or stimulus will change that. It will just cause inflation and volatile exchange rates, reinforced by governments printing money to satisfy their political ends.

What we see here is not a fight between left and right. It's a contrast between extreme populist policies that seem to claim that prosperity can be gained with no cost and no effort versus careful thinkers who are trying to chart a way out of the current quagmire for Greece. Leaving the Euro would, not only impoverish Greece in the short-run but would also allow the worst excesses of populism to displace any hope for reform and growth, allowing Greece to slip down the rank of wealthy nations, which it achieved with great effort post-war.

A better deal for Greece is a must. But it has to be accompanied by hard work and well-structured reforms. Stimulus is fine for short run smoothing of economic fluctuations and yes, too much austerity was imposed as a result of internal EU politics. But this does not mean that abandoning monetary stability and refusing to reform can lead to anything desirable. We need to vote YES, make a deal to stabilize the economy and then work hard to rebuild Greece.

This post originally appeared on HuffPost Greece and was translated into English.