May 16, 2012

Greece's Influence on the Eurozone Is Ludicrous

Maurice P. McTigue

Vice President, Outreach
Summary

Greece's irresponsible fiscal behavior leading up to the Great Recession caused its current problems, not the recession itself. The recession simply made abundantly transparent what insiders knew, but were unwilling to accept: Greece's fiscal behavior was unsustainable. Greece is now at a point where it only makes economic sense that they either leave voluntarily or have the European Union expel them.

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This excerpt was originally published in US News Debate Club. Read the full text here.

Greece's irresponsible fiscal behavior leading up to the Great Recession caused its current problems, not the recession itself. The recession simply made abundantly transparent what insiders knew, but were unwilling to accept: Greece's fiscal behavior was unsustainable. Greece is now at a point where it only makes economic sense that they either leave voluntarily or have the European Union expel them.

One consequence of a Eurozone departure will be real hardship for the people of Greece. Their short-term expectations of lifestyle and affluence will be significantly reduced. And although the spending power of their money will be dramatically lower than the euro's, their competitiveness will dramatically improve as a result of this devaluation. There will be increasing demand for Greek goods and services, particularly in industries like tourism, and gradually they will earn back their affluence.

Changing monetary values has long been the market's mechanism for rewarding good economic management and penalizing poor economic management. The creation of the Eurozone, however, distorted this tool. The value of the Euro is dominated by the huge economies of Europe like Germany, France and Italy. Since the economic performance of small economies like Greece and Portugal have little effect on the value of the Euro, their poor fiscal management prior to the recession was not reflected in currency values. Instead, it was disguised by the surrounding, large economies.

So why has tiny, little Greece been able to roil the financial markets of the world?