Is the Fed’s James Bullard right to warn that Greece would flounder if it left the Eurozone?

Christian Schulz is senior economist at Berenberg, says Yes

Grexit would be a devastating shock, with the painful consequences including a major devaluation of the drachma, default, capital flight and a sharp recession. Greece would probably be shut out of financial markets for years. For ordinary Greeks, it would mean a big reduction in living standards as imported goods would become very expensive. In the longer run, Greece might benefit from the devalued exchange rate, but only if governments maintained flexible labour and product markets, ran solid public finances and stability-oriented monetary policy. But left to its own devices, a populist Greek government would be tempted to alleviate the social crisis with welfare programmes by printing money and imposing price controls, stoking inflation and creating economic distortions that scare investors away and destroy jobs. Greece would risk developing away from the European mainstream and turn into a kind of Venezuela without the oil.

Sam Bowman is deputy director at the Adam Smith Institute, says No

A Greek Eurozone exit would throw the country’s banks into crisis, but it may still be its least-worst option. The European Central Bank has kept money tight across the Eurozone since 2008, but this has been most acute in Greece, where nominal spending collapsed during the financial crisis and has barely recovered since. This means that wages have had to fall in cash terms across the board for employment to recover, and they still have a long way to go. This process takes an excruciatingly long time because firms tend to prefer to fire some workers instead of cutting all their staff’s wages. That means many more years – perhaps more than a decade – of high unemployment. If Greece left the euro it could get around this process by devaluing its currency, as it and the other southern European states used to do before the euro. It would be very painful in the short term, but that may be preferable to the long-term depression that the country now faces.

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