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Greece's fight with the Titans of Europe
Globe Editorial
Greece’s troubles reveal fatal flaws in the euro
May 6, 2010
GREECE’S SOVEREIGN debt crisis, which has rattled global markets and raised doubts about the creditworthiness of Portugal, Spain, Ireland, and Italy, ought to cause leaders of the countries that use the euro to reexamine the basic premises of the single-currency club they created for 16 disparate economies and cultures.
In good times, the adoption of the euro helped facilitate trade. But prosperity also veiled inherent flaws in the euro treaty. Today, as several member countries struggle to come out of the worldwide recession while saddled with unsustainable debt and deficits, those flaws have become all too evident.
If Greece still had its own national currency, the drachma, it could do what countries with big fiscal imbalances have often done: let the local currency be devalued.
A cheaper drachma would reduce prices for exports and raise the cost of imported products. An increased volume of exports and greater consumption of domestic products could then engender a virtuous economic cycle. Greek GDP would rise, the unemployment rate would decline, social welfare costs would be reduced, and tax revenues would improve.
It would then be much easier for Greece to get its fiscal house in order than it is today. Instead, as the price for receiving a $145 billion bailout from the International Monetary Fund and other euro nations, the Greek government is being forced to cut salaries and pensions while raising taxes. This is a formula for protracted recession and the economic pain that accompanies it.
The euro treaty might have worked better, even with the economic differences among the 16 members, if there had been some way to enforce rules specifying that a country’s ratio of debt to GDP should not surpass 3 percent and its ratio of national debt to GDP should stay below 60 percent. But even Germany and France have broken these rules.
What’s more, the ponderous decision-making of the euro group tends to inflame rather than calm market anxieties in a crisis, as demonstrated by Germany’s foot-dragging over the decision to help bail out Greece. The spectacle of German dithering increased the danger of a market panic over the solvency of Portugal, Spain, and other euro zone countries.
The euro nations should consider some fairly radical changes. One would be to give Greece — and, if need be, other debtor countries — a temporary furlough from the euro. Another would be to subject all users of the single currency to the same fiscal discipline. Yet another would be to give up the euro as a well-intentioned but failed experiment.
Globe Editorial
Greece’s troubles reveal fatal flaws in the euro
May 6, 2010
GREECE’S SOVEREIGN debt crisis, which has rattled global markets and raised doubts about the creditworthiness of Portugal, Spain, Ireland, and Italy, ought to cause leaders of the countries that use the euro to reexamine the basic premises of the single-currency club they created for 16 disparate economies and cultures.
In good times, the adoption of the euro helped facilitate trade. But prosperity also veiled inherent flaws in the euro treaty. Today, as several member countries struggle to come out of the worldwide recession while saddled with unsustainable debt and deficits, those flaws have become all too evident.
If Greece still had its own national currency, the drachma, it could do what countries with big fiscal imbalances have often done: let the local currency be devalued.
A cheaper drachma would reduce prices for exports and raise the cost of imported products. An increased volume of exports and greater consumption of domestic products could then engender a virtuous economic cycle. Greek GDP would rise, the unemployment rate would decline, social welfare costs would be reduced, and tax revenues would improve.
It would then be much easier for Greece to get its fiscal house in order than it is today. Instead, as the price for receiving a $145 billion bailout from the International Monetary Fund and other euro nations, the Greek government is being forced to cut salaries and pensions while raising taxes. This is a formula for protracted recession and the economic pain that accompanies it.
The euro treaty might have worked better, even with the economic differences among the 16 members, if there had been some way to enforce rules specifying that a country’s ratio of debt to GDP should not surpass 3 percent and its ratio of national debt to GDP should stay below 60 percent. But even Germany and France have broken these rules.
What’s more, the ponderous decision-making of the euro group tends to inflame rather than calm market anxieties in a crisis, as demonstrated by Germany’s foot-dragging over the decision to help bail out Greece. The spectacle of German dithering increased the danger of a market panic over the solvency of Portugal, Spain, and other euro zone countries.
The euro nations should consider some fairly radical changes. One would be to give Greece — and, if need be, other debtor countries — a temporary furlough from the euro. Another would be to subject all users of the single currency to the same fiscal discipline. Yet another would be to give up the euro as a well-intentioned but failed experiment.
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