Saturday, May 8, 2010

Greece would have been better off without euro?

The crisis in Greece has done much damage to the mighty euro, which has reached 1.25 to a US dollar on May 06th 2010, which had a rate of about 1.40 at the end of January. With the adoption of euro, the Greek economy attracted a lot of foreign financing inflows, and international investors became overly optimistic about the Greek economy. With the global economic down-turn, these inflows almost stopped, and Greece had to face the reality. A reality in which its government spending has escalated, prices and wages have increased dramatically. The government deficit as a percentage of GDP has reached to unsustainable levels.

So, why has Greece become so helpless with its high debt? The answer is simple; it is tied with the euro, and it does not have the luxury of an independent monetary policy. Had Greece had its own currency, its central bank would have had the chance to have an independent monetary policy. It would have been able to have a monetary expansion, or devalue its currency in order to obtain some degree of international competitiveness.

But now, Greece is forced to be dependent on the strong European nations to provide the needed assistance, and if they fail to do so, there is less hope that Greek economy can come out of this crisis. Hence, even now it might be best for Greece and also for the rest of euro-countries, if Greece abandon the euro, and have its own currency once again.

What have we learnt from all this? One;, in order to have a common currency we need synchronized fiscal policies and fiscal discipline. If it cannot be achieved, it will be almost impossible to have a common monetary policy. Afterall, at the end of the day, Its Mostly Fiscal (IMF). Two;, it is extremely difficult to have a common monetary policy and monetary union (with common currency), without political union or common sovereignty. As people in countries like Germany will be less willing to finance the fiscal irresponsibilities of other countries, like Greece. If the whole euro area was one single sovereign state like that of United States, it would have been politically plausible to provide federal funds or assistance to those states with difficulties.

But now, when the crisis has hit Greece, its government is not able to act with an independent monetary policy. And, its too much to expect that all the other european countries will go on providing assistance to Greece. I wonder, if it'll be better for Greece to let go of euro, and have its own currency.

1 comment:

  1. The situation in Greece is difficult to even talk about because as i see it either way it is going to hit rock bottom (if it have not already).
    “How can Greece grow out of its debt if there is deflation?” asked Jean-Paul Fitoussi, a professor of economics at the Institut d’√Čtudes Politiques in Paris. “Deflation increases the debt burden, so we are following this virtuous circle that is bringing us toward hell. Economics has nothing to do with virtue, which can kill an economy.”
    Again, talking about leaving euro, the problem is if the Greek central bank/government decides to leave euro it will most certainly trigger bank-runs and if the ECB suggests it it would trigger a speculative attack greek bank. the whole thing is just too problematic. whatever market does should be seen as the inevitable or the best outcome.