Wednesday, March 17, 2010

The State of the Euro Zone

In the early decades of the twentieth century Germany experienced two great shocks, the hyperinflation of the twenties eventually followed by the second world war. These two events shaped German policy in the post WWII era, the twin imperatives of anti-inflationary monetary policy and European integration. Today however the two policies are coming to a head with the collapse of the Greek economy. What kind of policy should Germany pursue, tolerate a large deficit or expel Greece from the Euro zone. Martin Wolf at the Financial Times discusses the above conundrum in his opinion column.

The situation in Greece has enormous implications for the Euro zone, both economically and politically. Unlike the United States Greece can't print its way out of the crisis, since the printing press of the Euro (the European Central Bank) is in Germany. At some point Greece will find it more convenient to leave the Euro; however the political ramifications will be enormous. On the other hand Martin Feldstein argues that this is inevitable.

Hence the pandering has begun, and here's probably one of the worst articles from the Economist, both praising German restraint and demanding a more Anglo/Saxon (the British/American) model of overconsumption to stimulate the rest of Europe. The comments on the article are actually more insightful although the article lays down the context.

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