Holiday from the eurozone would bankrupt Greece

Friday, February 19, 2010 02:00. Copyright The Financial Times Limited 2010.

From Mr Dimitri B. Papadimitriou

Sir, Martin Feldstein (February 17) argues in favour of Greece taking a holiday from the eurozone. While his very thoughtful comment makes sense on the face of it, if implemented I believe it will bankrupt Greece absolutely.

Under his plan, once the new drachma is devalued there would be a very strong demand for wages and prices to rise in tandem with the devaluation, so that parity is maintained with the euro. The result would be high inflation rates and even bigger budget deficits. The country’s holiday from the eurozone would likely become permanent, and prime minister George Papandreou’s valiant efforts to change the culture of a country’s expanding and wasteful public sector, rife with tax avoidance and evasion, will be forever lost.

The plethora of articles in your pages and others, some arguing in favour and others against a bail-out, contribute to market confusion and drive the country’s financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government’s ability to achieve its deficit goals ever more difficult.

Since the architects of economic and monetary union are neither about to change the system, nor to provide a sympathetic ear and a helping hand, what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary.

Dimitri B. Papadimitriou
President
Levy Economics Institute
Annandale, NY, US