Friday, July 01, 2011

Confusion on Greece

Megan McArdle's column highlights all the confusion going on in Greece right now. One commenter gets it right:
Jay wants to know why the Greeks should bother to leave the euro if they're going to default anyway:

My own belief is that Greece should exit the euro, and redenominate its debt in drachmae, which would constitute a de-facto default
In what way does changing currencies help? I mean, you're already defaulting.

Is the idea that you'll be able to inflate away future debts more easily? Who would buy Greek debt knowing that the only reason they are issued in Drachma instead of Euro is specifically because the Greeks intend to inflate it away?

Isn't this just the difference between nominal and real interest rates?
This is exactly correct. If Greece re-denominated the debt in drachmae it would constitute a default. It would also constitute a re-assertion of monetary sovereignty, and Greece would never have to worry about defaulting again, it would just need to worry about balancing unemployment against inflation. The better it gets at tax collection, the more it can better it can do at lowering unemployment without triggering inflation.

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1 Comments:

Blogger Larry Staton Jr. said...

"The better it gets at tax collection"

Greece seems to have a problem with that:
http://www.nytimes.com/2010/05/02/world/europe/02evasion.html

9:21 AM  

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