Rogoff on Greece's Future in the EU

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Following the announcement of the €130 billion ($171 billion) bailout of Greece, Der Spiegel interviewed Harvard economist Kenneth Rogoff.  Like many economists, Rogoff believes Greece's leaders have a lot of work still to do.  And he is firmly in the more austerity camp.  He told Der Spiegel that he would recommend "The government in Athens should be granted a kind of sabbatical from the euro."  In Rogoff's plan, Greece would still be in the EU, but out of the monetary union--at least until the country can lower its debt burden.  Otherwise, he is not particularly optimistic that Greece will be able to remain in the EU.

SPIEGEL: If Greece were to leave the euro zone, a wave of panic might engulf other countries struggling with debt, such as Portugal. How can we prevent the contagion from spreading?

Rogoff: If Greece leaves the euro, the markets will demand sensible answers to two questions. First, which countries should definitely keep the euro? And second, what price is Europe prepared to pay for that? The problem is that the Europeans don't have convincing answers to those questions.

SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart?

Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s.

SPIEGEL: Does that mean the whole idea of the euro was a mistake?

Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically.

SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled.

Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union.

Read the full interview here.


Posted 02-21-2012 6:17 PM by Graham Griffith
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