Wednesday, February 24, 2010

Should Greece Take A "Euro-Holiday"?

Longtime critic of the euro since before it was adopted, Martin Feldstein, has suggested that Greece should take a "euro-holiday" and temporarily revert to its old drachma with a devaluation of that as a way to deal with its current budget and debt crises. This is sharply criticized by Richard Baldwin and Charles Wyplosz in a posting at VOX. I agree with their arguments, including that such a holiday would not be a temporary matter, but a permanent one, with the Greeks probably pathetically repegging to the euro soon after, but not able to get back in once out, quite aside from the possible more general unraveling of the Eurozone itself that would likely follow, much to the delight of such anti-euro folks as Feldstein.

In any case, I think it is worth considering whether or not it is better to be inside or outside the euro in Europe. Most of those outside and wanting to stay so have been higher income countries, Norway and Iceland and Switzerland (not even in the EU, although now-collapsed Iceland wishes it was all the way in), Sweden and Denmark and feisty UK, all in the EU. On the other side it seems that most poorer countries in Europe want in to both the EU and then into the euro as well. Is this wise, given the Greek experience, apparently partly due to overborrowing on the low interest rates available to those in the Eurozone? Mostly I would say yes. If one looks at what happened in Europe last year, the worst performing countries in terms of GDP were two transition countries in the EU, but not in the Eurozone, Latvia and Lithuania, both with around 18% declines in their GDPs. The second and third best performing (former?) transition economies were the two in the Eurozone, Slovenia and Slovakia, both of which experienced minimal declines in GDP. Many of those hurting badly, including Hungary, had borrowed lots of foreign currencies and then got in trouble.

However, I must note the exception. That would be the best performing economy in all of Europe, the only one to show positive GDP growth, Poland, an EU member but not in the Eurozone. However, I confess that I do not know how they pulled it off, and suspect that the Latvian-Lithuanian-Hungarian experience is the more likely and common for those who might choose to exit the Eurozone, even on a "holiday."


Brenda Rosser said...

This question is way beyond me.

I really don't know what the difference is between the EU and the Eurozone.

My instincts tell me that it would be pretty disastrous for a nation to give up its ability to create a domestic currency. However, I also see the advantages of a currency union to counter US dollar hegemony.

I think the EU nations should get together and limit the size of all corporations that operate within them. So that the political/economic balance is not destroyed by mega-sized corporations and their associated networks.

Then nations should have the option to print their own currency for purely domestic transactions and a different currency for trans-national exchanges.

All off the cuff...

TheTrucker said...

Many of the Libertarians think that banks should be able to print their own money. Here in the USA they believe that each state should surely be able to have its own currency. This may actually happen if things get a lot worse. The "financiers" or "hedge bettors" have already destroyed all the fiat currencies by creating massive amounts of credit outside the banking systems and outside the control of the nation states. It is a real test of nation states to see if they will survive. And the only way they will be able to survive is to make sure that they regain control of money by printing a lot more of it and taxing a lot more of it. EARNED incomes need to increase by 50% and income tax rates on the very wealthy need to be increased by at least that much.

TheTrucker said...


vimothy said...

But Latvia has pegged its currency to the euro! It' basically in the exact same boat, which is why its doing just as bad.