Loan guarantees or temporary loans from France and Germany can help avoid a crisis returns this spring. However, temporary financial patches not cope with the actual problem: the budget deficit of Greece is 13% of GDP. To prevent explosive ratio of government debt to GDP of Greece to cut future annual spending and raise taxes in combination, which would be the equivalent of at least 10% of GDP.
Unfortunately, such budget cuts would cause a sharp rise in unemployment, already one located at around 10%; the political opposition would make such action impossible.
Had Greece still had its own currency, it could devalue the drachma in parallel to reduce imports and increasing exports, which would reduce the trade deficit amounting to 15% of GDP. Greece's GDP and employment would increase if the growth in exports and decline in imports added jobs inside the country and increased productivity that has been lost because of increasing taxes and reducing government spending. Since Greece does not have its own currency, it can not freely follow this strategy.
So what can be done Greece? She simply can raise taxes and cut spending, dooming their citizens for many years of unemployment. Can be saved European partners, who year after year will give the Greek Government had sufficient means to pay bills without raising taxes. Even if the small size of the Greek economy has made this possible course of events - he would have been rejected by Germany and France, who rightly fear that such a rescue would require other, larger countries of the eurozone. Another option for Greece is out of the eurozone, the process from which other countries in the eurozone fell out with huge fiscal and trade deficits.
None of the above appeal was not accepted by Greece and its European partners. However, there is a good idea to help save the single currency, while helping the country cope with the two deficits.
The rest of the euro area could allow Greece to take temporary leave from the right and obligation to go back to a more competitive exchange rate.
More specifically, Greece will switch to the euro at the drachma with the initial ratio of 1:1. Bank balances and commitments will remain in euros. Wages and prices will be in drachmas.
If the agreement called for Greece to return the exchange rate to a level of 1.3 drachmas per 1 euro, the Greek currency would immediately fell 30% against the euro and other non-European currencies. If there is little or no inflation at all, the Greek food would have been much more competitive in domestic and foreign markets.
In exchange for permission to set its exchange rate, Greece would have to agree to stringent fiscal measures in order to rapidly reduce the budget deficit and keep it at a low level. Although the high cost of imports would reduce local real profit of the population, the damage would be limited by the fact that imports account for less than 20% of Greek GDP.
Other members of the eurozone could be against such a competitive advantage for Greece. These countries may be concerned about the realization that countries with higher trade deficit could require the same conditions. However, the decision to allow Greece to lose its exchange rate may be still better than if the country does out of the eurozone. And, of course, is better than to condemn the Greeks for decades of suffering. And also it's better than if Germany and other countries that provide ongoing financial assistance to Greece, and will come to the thought of leaving the euro zone.
European Economic and Monetary Union is doubly wrong. First, it forces the country to live with one interest rate and exchange rate, which may not be suitable for all participants. Secondly, the existence of a single currency and an independent national fiscal policies leading to fiscal profligacy. The situation in Greece - is the manifestation of these deficiencies. If Europe's political leaders still want to maintain the current political system, to allow Greece to temporarily reset the exchange rate - this is the best option.
Unfortunately, such budget cuts would cause a sharp rise in unemployment, already one located at around 10%; the political opposition would make such action impossible.
Had Greece still had its own currency, it could devalue the drachma in parallel to reduce imports and increasing exports, which would reduce the trade deficit amounting to 15% of GDP. Greece's GDP and employment would increase if the growth in exports and decline in imports added jobs inside the country and increased productivity that has been lost because of increasing taxes and reducing government spending. Since Greece does not have its own currency, it can not freely follow this strategy.
So what can be done Greece? She simply can raise taxes and cut spending, dooming their citizens for many years of unemployment. Can be saved European partners, who year after year will give the Greek Government had sufficient means to pay bills without raising taxes. Even if the small size of the Greek economy has made this possible course of events - he would have been rejected by Germany and France, who rightly fear that such a rescue would require other, larger countries of the eurozone. Another option for Greece is out of the eurozone, the process from which other countries in the eurozone fell out with huge fiscal and trade deficits.
None of the above appeal was not accepted by Greece and its European partners. However, there is a good idea to help save the single currency, while helping the country cope with the two deficits.
The rest of the euro area could allow Greece to take temporary leave from the right and obligation to go back to a more competitive exchange rate.
More specifically, Greece will switch to the euro at the drachma with the initial ratio of 1:1. Bank balances and commitments will remain in euros. Wages and prices will be in drachmas.
If the agreement called for Greece to return the exchange rate to a level of 1.3 drachmas per 1 euro, the Greek currency would immediately fell 30% against the euro and other non-European currencies. If there is little or no inflation at all, the Greek food would have been much more competitive in domestic and foreign markets.
In exchange for permission to set its exchange rate, Greece would have to agree to stringent fiscal measures in order to rapidly reduce the budget deficit and keep it at a low level. Although the high cost of imports would reduce local real profit of the population, the damage would be limited by the fact that imports account for less than 20% of Greek GDP.
Other members of the eurozone could be against such a competitive advantage for Greece. These countries may be concerned about the realization that countries with higher trade deficit could require the same conditions. However, the decision to allow Greece to lose its exchange rate may be still better than if the country does out of the eurozone. And, of course, is better than to condemn the Greeks for decades of suffering. And also it's better than if Germany and other countries that provide ongoing financial assistance to Greece, and will come to the thought of leaving the euro zone.
European Economic and Monetary Union is doubly wrong. First, it forces the country to live with one interest rate and exchange rate, which may not be suitable for all participants. Secondly, the existence of a single currency and an independent national fiscal policies leading to fiscal profligacy. The situation in Greece - is the manifestation of these deficiencies. If Europe's political leaders still want to maintain the current political system, to allow Greece to temporarily reset the exchange rate - this is the best option.
The Financial Times
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