Greece will leave the euro

1 July, 2015 at 22:17 | Posted in Economics | 2 Comments

 

I think Steve is right here (Yanis says something else, but when people have to say things, it doesn’t always reflect what they actually think …)

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  1. I don’t think we should entirely condemn the Euro, which was put in place for some good reasons (as well as some bad ones). The problem is we have had monetary integration without political and fiscal integration. The intention, before the rapid expansion of the EU to include the A8 was that political and fiscal integration would quickly follow the creation of the Euro.

    A lot of the reasoning being pushed for Greece to abandon the Euro and devalue is based on ahistorical open-economy ISLM/Optimal Currency Area types of MIT Gadget Economics which says that if you have your own currency you can devalue, have an export led expansion and independent fiscal policy. But pre-Euro Drachma Greece had many devaluations. The problem was that devaluation raised the costs of imports (German machinery, Middle East Fuel, raw materials) which actually worsened the structural trade deficit and further reduced the purchasing power of the currency and raised inflation. In the dollar denominated trading system, a small country needs foreign exchange to buy essential imported inputs for its exports which is difficult if your currency does not have much purchasing power. Many successful emerging countries pegged their currencies against the dollar for that reason and maintained dual exchange rate systems, helping to prevent capital flight and enabling infant industry protection and a sheltered domestic financial system. But pre-Euro Greece since its independence from Turkish rule was a continuous catch-22 story of devaluation, default, inflation and little economic development.

    The best hope for Greece is political and fiscal integration in Europe – with the Euro.

  2. Financially Grexit has already happened. The negotiations are to see if there is a way of avoiding it…


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