25 LSE economists opine on Greece.

Bit of a slip up in this letter signed by twenty five London School of Economics economists about Greece.

They argue amongst other things that relaxing fiscal austerity in Greece will expand GDP, which in turn will expand Greek government income, which in turn will help it repay its debts. In fact (and assuming Greece stays in the EZ, which is what the authors argue for) fiscal stimulus will just suck in imports, which puts Greece FURTHER in debt.

The LSE authors’ also argue for what they call “structural improvements” which consists amongst other things of “anti-corruption, tax compliance, and institutional reform of product and labour markets”.

The latter reforms (in contrast to straight fiscal stimulus) WOULD improve the efficiency of the Greek economy as a whole, and in particular the efficiency of Greek exporters and “import substituters”. And that in turn would improve Greece’s balance of payments, which would help it repay debts.

As to whether those forms of increased efficiency will match up to what is needed to facilitate a repayment of debts, unfortunately I doubt it. My hunch is that Grexit plus devaluation is the least bad solution.

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P.S. (14th July, 2015) My suspicions in the last para above seem to be confirmed in this IMF work.