Greece should exit euro to save economy, says Ifo head
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By Steven C. Johnson
Greece's ability to recover competitive economic standing
will be severely constrained if it continues to use the euro, and other
indebted eurozone countries will likely face similar struggles, the head of
Germany's prominent Ifo economics institute said on Monday.
"I personally believe there's no chance for Greece to
become competitive (while) in the eurozone,» Hans-Werner Sinn, president of
Ifo, said in a luncheon speech in New York.
"If Greece is kept in the eurozone, there will be
ongoing mass unemployment. But if they exit, they will see a very sudden
recovery,» he said, as lower prices boost competitiveness.
He also cited risks of other indebted eurozone countries
facing severe spending cuts and tax hikes.
"Cutting wages and prices to the extent necessary in
some southern European countries is impossible, whatever the politicians say,»
Sinn said. «Policy is unable to overcome the laws of economics."
Greece has received more than 100 billion euros in aid since
its debt crisis began, and last month creditors agreed to trade their Greek
bonds for lower-valued securities.
Sinn said it would have been better to use that money to
help Greece manage its exit from the eurozone.
Complicating matters are the various European Central Bank
lending operations that Sinn said amount to «unlimited credit» for troubled
countries.
The ECB has extended more than 1 trillion euros in low-cost,
low-collateral, three-year loans to eurozone banks. Some of that money has in
turn been loaned to eurozone governments to help bring down rising borrowing
costs.
Sinn said these operations circumvent parliaments and will
eventually lead to a common European government bond that removes interest rate
risk and allows countries to borrow at below-market rates rather than pay down
their debt and reform their economies.
"Uniform interest rates will lead to another
misallocation of capital in Europe,» Sinn said.
He said Ireland has been successful in cutting its prices
and trimming debt, relative to other troubled eurozone countries, because its
housing bubble began to deflate before the ECB and the European Union rolled
out cheap loans and rescue programs.
"Ireland had to help itself,» he said.
[Reuters]
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