Should Greece Ditch the Euro?

Martin Feldstein writes that Greece ought to take a holiday from the euro. This is one of those fascinating ideas that economists like to come up with, but are completely unrealistic politically. If Greece were to leave the euro, it would be a precedent that Eurozone may not like.
Here’s the problem. To really fix its problems, Greece needs some serious financial reforms, meaning higher taxes and/or lower spending. That would hurt the economy which is already in pretty bad shape.
But if Greece had its own currency, then they could devalue. That’s not a great move but it’s better than the alternatives. The problem is that the eurozone has an integrated monetary policy but it’s not integrated politically. Now countries like Germany and France are balking at a bailout, but the fact is that those kinds of moves are inherent in monetary integration. If you want one currency, you have to take the good and the bad.
Feldstein favors letting Greece leave the euro “with the right and the obligation to return at a more competitive exchange rate.” Of course, what if they don’t want back in? Furthermore, as Tyler Cown points out, this could lead to a run on Greek banks: “Who wants a Euro deposit to be converted into a drachma deposit?” Not me.
For their part, the French have snapped into action. They blame us. Or more specifically, six “Anglo-Saxon” hedge funds.
Now, can get California to ditch the dollar?

Posted by on February 17th, 2010 at 11:03 am


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