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The Simple Solution for Greece that Europe Won't Try

RealTime Economic Issues Editor (PIIE)



In an interview with Ezra Klein of Vox, Adam S. Posen argues that the euro area lacks the fiscal transfer mechanism that exists in the United States enabling poor countries that get into financial trouble to be aided by wealthier countries that are part of the currency union. A breakdown in trust has changed the politics of Europe, he states. While the Greek government argues that its European creditors should be more realistic, the European leadership is saying to Greece that it lacks their trust to live up to its promises. Posen calls on Germany and other northern European countries to “accept the fact that Greece is not going to pay most of its debts” and that these debts are partly the fault of the Northern European financial institutions, which “should suffer for making stupid loans” to Greece. Posen outlines many Greek policy failures but says the more important issue is that there was an irresponsible surge in capital from Northern Europe to Greece during the early and mid-2000s. While the short-term consequences of Greece's crisis are likely to be limited, the euro will be seen as a less safe currency than it once was, Posen says, raising interest rates in the poorer countries of Europe.

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