Thursday, June 30, 2011

The Greek Problem is a Fiscal Problem, Period

There's a tendency among analysts in the US and the UK to treat the Greek debt crisis as a currency crisis, and to associate the Greek crisis with the Argentina currency board downfall. These arguments appear to be convincing at first sight (what explains their popularity) but are nonetheless deeply flawed.

The inevitable reality that applies to all countries is that you cannot solve a deep government budgetary problem with monetary measures. You have to solve the deep government budgetary problem, period.

Comparing Greece with Argentina is however ludicrous. Argentina had a weak national currency based on a deeply flawed monetary arrangement which lacked any real backing. Greece on the other hand is full member of a monetary zone based on a solid currency, the euro, backed by a large federation of important economies. The crisis has only served to confirm the euro's strengths.

To argue that the solution to Greece is to leave the eurozone is as laughable as to argue that Arkansas would be better off by leaving the dollar monetary zone once it faces budgetary or debt refinancing difficulties. Its fiscal problems wouldn't magically go away just by adopting a new (and probably weak) currency, and many new difficulties would be created.

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