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For instance: Is the euro a failure? (Gilles Saint-Paul, 5 May 2010)
Thus it is somewhat disturbing that we are now asked to pour money into Greece to "save the euro" (while the British, who have no stake in the euro, are spared that burden). Besides the fact that apart from Germany, the other large Eurozone economies (France, Italy, and Spain) are barely in a better shape than Greece, and besides the moral hazard effects of the intervention, it makes little sense to prolong a monetary regime which is actually one of the reasons why those countries are in trouble.

Furthermore, in a typical adjustment program, shock therapy aimed at stabilizing public finances must be associated with policies that make it possible for the economy to start growing again - a necessary ingredient if one wants the program to be politically acceptable or just to fulfil its objectives. After all, jobs are needed for the people to tolerate the hardship imposed on them, and fiscal receipts are needed for the government to avoid fresh insolvency problems five years down the line.

In the case of Greece an important obstacle to recovery is the competitiveness problem. If Greece was not part of the European Monetary Union an IMF adjustment package would presumably have involved a sharp depreciation of the currency (if it had not happened before under the sheer pressure of the markets). By insisting that Greece remains in the Eurozone, the other member countries are greatly reducing the success probability of their plan.



The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:29:49 AM EST
[ Parent ]
If Greece was not part of the European Monetary Union an IMF adjustment package would presumably have involved a sharp depreciation of the currency

Judging by the track record of the IMF in Russia and Indochina, I call wishful thinking on that bit.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 6th, 2010 at 11:34:31 AM EST
[ Parent ]
First the central bank burns its foreign reserves in a futile attempt at protecting the currency, providing a narrow window of opportunity for well-connected people to move their assets into hard currency (the downward exchange rate pressure from this is compensated by some of the foreign-reserve burning). Then massive devaluation happens, and then the IMF comes in.

The devaluation is not part of the IMF package, but it does take place.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 11:37:40 AM EST
[ Parent ]
In Russia, at least as Stiglitz tells the story, the IMF came in before the devaluation and used dollar-denominated loans to prop up the overvalued currency, thereby extending the window of opportunity for asset stripping.

It boggles the mind how anybody at the IMF could possibly have though that using borrowed dollars to prop up the exchange rate could even be within shouting distance of sanity, let alone a good idea.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 6th, 2010 at 11:50:47 AM EST
[ Parent ]

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