More Evidence for Greek Default

The Economist has a chart up today comparing growth rates pre- and post-default in recent years. Interestingly, countries have typically grown faster after default than before. There are reasons to be skeptical of a causal relationship, but it still shows that default is no disaster.

Scholarly work by John Ahlquist also has shown that default tends to attract more rather than less private investment. I have found a similar relationship in the data I have worked with.

More reasons to think that the catastrophic scenarios entertained to get European taxpayers to go along with bailouts are just not realistic.

2 thoughts on “More Evidence for Greek Default

  1. A default imposes, mathematically, a negative interest rate, so from a stimulus perspective, qualifies as a giant interest rate cut. Money for nothing! Funds that would have been diverted to debt service are instead used for consumption etc. So growth results as we measure “growth” which is by way of exclusive focus on changes in year to year activity and complete disregard of balance sheets. So it is a somewhat biased definition of “growth”.

    Also, keep in mind that there are few antecedents for default by a member of a monetary but not fiscal union so be careful about inferences. Many default precedents are probably nations with their own currency.

  2. Just a thought from glancing across the chart: I don’t believe any of the other countries listed were in a major currency union. Unfortunately, my grasp of economics is somewhat limited, so I don’t know what the results of a one member default would be, but judging from France and Germany’s reactions (who are probably acting in enlightened self-interest, not out of concern for Greece), I would guess that it wouldn’t be too good for them.

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