The euro debate at

Worth checking out. Just a few quick things to add.

Wyplosz notes that if Greece leaves the euro, then its new currency will depreciate sharply against the euro, in which case:

The new GDP, measured in euros, will therefore decline to some €140 billion, 40% lower than initially. This works out to a public debt to GDP ratio of 210%. … Defaults by both the government and private borrowers would be unavoidable. At this stage, it is very difficult to see an exit from the euro area as a panacea. 

Huh? Nobody who recommends euro-exit is pretending that the debt burden will be sustainable. Come to think of it, nobody who recommends against euro-exit believes this either. So why cite the enormous debt/GDP burden as an argument? The point is that defaults are unavoidable in either path — the choice is whether we get there only after years of economic contraction, rising unemployment and general misery (with persistent fears plaguing the international capital markets), or we get there now, and let the Greek economy get back on its feet. Suffocation is no fun. I’ve said it before, but I sense a dogmatic quality to the arguments against euro-exit. “… it is very difficult to see an exit from the euro area as a panacea” means you’re not looking very hard. Try reading this insightful piece from the Economist for starters: “Default, and other dogmas“.

Next is Eichengreen. His statement, against euro-exit, is a parody of the argument, applied to the USA. Essentially, he asks, why aren’t we jumping up and down advocating Californian exit from the dollar? Well, California is not sovereign. Which is why the IMF doesn’t classify its currency arrangements. It does for each of the euro-zone members (their exchange-rate regimes are “no separate legal tender”). But California is a great example, because the emission of IOU’s by the state government is a pretty clear indication that California needs monetary relaxation.

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