The Corner

What’s Next for Greece?

This morning, I have a piece in the New York Times’ Room for Debate blog about the future of Greece. My main point is that it is unlikely that the country will exit the euro because it wouldn’t necessarily address its problem and rich nations wouldn’t let them.

First, even if Greece exited the euro zone, the Greek debt (public and private alike) would remain in euros. As the George Mason economist Garett Jones explains: “This was tried before in Asia in 1997. Devaluation when you owe money in a hard currency creates as many problems as it solves.”

Second, while there is little doubt that a weaker currency than the euro would be more appropriate for a relatively poor country like Greece, richer nations in Europe, like Germany, won’t accept such a move. They fear a bank run on other weakened countries like Portugal and Spain would follow. As a result, there are likely more bailouts in Greece’s future rather than a devaluation. The question, of course, is how long will the German people be willing to pay for the fiscally irresponsible behaviors of their neighbors.

As such, we should expect more bailouts for Greece. They won’t change much about the situation but they will preserve the status quo for a while.

If you’re interested, Tyler Cowen had a very good column a few weeks ago explaining why Germany would prefer bailouts to a Greek exit from the eurozone. Of course, that will only last until taxpayers in richer euro nations get fed up with bailing out everyone else. The Finns are already expressing serious anti-euro feelings, and so are the German people.

Other people weigh in here.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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