Will Greece bid farewell to Euro?

by rajarshi on May 28th, 2010 3

The ongoing sort-of-crisis in Europe and Greece in particular has made economist Paul Krugman chew his words on Euro optimism. He now agrees in his New York Times column that everything is not so rosy for the Union and its currency and argues that there are “three possible ways that Greece could stay on Euro”. However the catch is that none of these three ways is politically feasible. And if none of these ways stand plausible, Greece would have no option but to eventually walk out of the Euro Union-something which would be potent enough to send across shock waves. However Krugman opines that this result could be avoided if “European leaders are able and willing to act far more boldly than anything we have seen so far”. But Greece’s abandonment of the Euro seems pretty much where the scenario is heading right now.

With due respect to Krugman and his views, many people and other economists have reasons strong enough to differ in their views. The premise of Krugman’s argument is that Europe fails to be an optimal currency because the European Union lacks a centralized government which can enact transfer payments among its various regions. And all inclusive Greece package is utmost necessity to save the Greek Economy and further fallout.

image source:cartoonstock.com

But going back to the 19^th century, many would recall that the US was in a position very similar to what Greece is in now. The basic difference however was that it had a different labor system which facilitated the adjustment of wages and brought in labor mobility. The mobility part will be difficult to replicate in Greece because of the language barrier.

The importance of languages and the drastic cultural differences between different countries of the Euro-zone make it excessively difficult for nations to amalgamate easily and hence make the borders appear even thicker and impenetrable. Economists agree that if Greece were to branch off from the Euro union, it would definitely feel the pangs of pain. Keeping Greece in the union serves the interest of other European nations too-for reasons more political than economical. The dream of being a part of an European Union has been of extraordinary importance to countries in Southern and Eastern Europe. If Greece decides to leave, these countries would be left with no hope of joining the parent.

Simon Johnson and Peter Boone opine on the New York times blog that leaders of European union could “talk down the Euro” which would cause bond yields to “rise on the Euro zone periphery”. Once such an action is triggered off, leaders can persuade weaker governments in the Euro zone to restructure financially. This might mean replacement of the management of some top European banks also. All said and heard, there can be no doubt that the current crisis proves beyond an iota of doubt that bank executives have not behaved in a responsible way and additionally this is a massive failure for the Euro think tank-more so at a political level.

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Comments

Miguel Costa

Well…. I don’t really mind that the euro is down.. in fact I think that it is a very good think for all countries in the union… that way the consumers won’t buy from external countries and their money will stay in europe.. and the external markets( like the USA )will start buying from europe …