Greece in 2010: A Tragedy Without(?) Catharsis

The Greek crisis in 2010 was a tragedy waiting to happen. However, and contrary to the impression created by the stabilization program's immediate focus on restoring fiscal balance, its roots lie in the erosion of international competitiveness over the past three decades and the attendant de-industrialization of the country. Catharsis, i.e., the creation of the conditions for sustainable long-run growth, requires a coherent, medium-term strategy, bolstered by wide social consensus, to improve competitiveness and redeploy labor and other production factors to the tradeable sector. Nevertheless, owing to the accumulated imbalances, catharsis is fraught with risks. Yet, the proposed alternatives, such as, government debt rescheduling with possible discount and a temporary or permanent exit from EMU, are even worse. They are not likely to succeed, for they do not adequately address the dramatic erosion of competitiveness and have severe potential repercussions.