Monday, March 29, 2010

My Big Fat Greek Crisis

The Greek debt crisis has led to a great deal of hand-wringing outside Greece. Joachim Starbarry (what a great name!) captures the spirit of the conundrum:
The fiscal strictures of the euro zone are forcing the country to curtail public expenditures, raise taxes and cut government employees’ salaries, actions that may push Greece into a deep depression and further undermine its already weak international credit standing. The alternative to this collapse, having other members of the euro zone assume its debt payments, is no better. Doing so would be a signal to other debtor countries that they could abandon their own remedial efforts and instead count on foreign assistance. The creditor countries would be brought to their knees.

In short, the euro is headed toward collapse.
He concludes that Germany and other fiscally stable states must withdraw and form their own currency union, which would surely lead to the collapse of the Euro. This solution, he argues, would benefit all of Europe. The Greeks could (in a crisis) devalue their currency to slither out of their debts and gain an export price edge. The Germans wouldn't be constantly pressured to bail out irresponsible siblings.

But Starbarry's premise that Greek austerity measures will push the country into recession is far from certain. In fact, it is precisely the country's culture of dependency that keeps it stuck in relative poverty. Other poor countries on the European fringe have done very well, and weathered the recession without a crisis. How? By freeing up markets, running government responsibly, and ending the culture of corruption.

Contrary to the popular view, the Euro is a gift to Greece. If the Euro weren't in place, surely Greece would devalue its currency in panic, and the profligate culture would continue. This is an historic opportunity for Greece to break with the lame traditions of the 20th century and embrace the hard decisions that are concomitant with a hard currency.

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