Wednesday, May 23, 2012

Here We Go Again with Greece

This will be the third May in a row in which I teach a course on economic policy in Germany.  The first time I included a case study on the Greek crisis since it was in the news at the time.  Later in the summer, the Greek story settled down only to come on strong again the next April/May. So, I used it again.  Now, we see Greece is again a major story and I will use it a third time.

There are some differences though. While I introduce the students to optimum currency area theory and apply it to the euro-zone, I didn't seriously consider whether Greece might exit the euro in the past.  Now I think the probability is at least 50-50 that they will exit the zone.  A lot depends on the Greek election in June, but even if the more radical elements do not win, will the people put up with "austerity" to the point where it might pay off? How long will it take?  Can they even do it or are their debts too high?

To add to the concerns is the recent French election and how the relationship between France and Germany will alter.  For most of the post-war period, France called the shots with Germany often financing the projects. But, with the passing of years and the growing strenth of Germany's economy, Germany is asserting itself more.  Both the French and German leadership have been committed to the European Union and increased political integration, but this may be changing too.

A recent book in Germany, written by a former banker with the German central bank, is roiling things more.  Thilo Sarrazin's book is entitled, Europe Doesn't Need the Euro. Chancellor Merkel has been quoted as saying the the euro fails, then Europe fails.  It should be an interesting time in Germany

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