Editorial: Pitfalls of currency union exposed

Last updated 05:00 19/06/2012

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OPINION: Force to choose between the frying pan and the fire, Greek voters have opted for long-term penury rather than immediate catastrophe.

The narrow victory by pro-bailout parties in yesterday's Greek election has been welcomed by international markets, which feared worldwide contagion if Greece chose to renege on its commitments.

However, the prospects for Greeks today are as bleak as they were before the rerun of the stalemated May 6 election.

The imminent collapse of the Greek economy has been staved off, but half of young Greek adults remain unemployed, the economy continues to shrink and Greece is still burdened with crippling levels of debt.

There are lessons for the rest of the world as well as Greeks in the country's economic predicament.

The first is that nations that live beyond their means eventually have to pay the price of their profligacy. Greece's woes stem from the alacrity with which it seized upon the cheap finance that became available when the country signed up to the euro and international bankers made the mistake of assuming that all euro nations were as credit worthy as the eurozone's largest player, Germany.

The second is that currency union is a straitjacket into which nations should be extremely wary of strapping themselves.

There was a time, not that long ago, when it was common to hear politicians from across the political spectrum in New Zealand arguing the benefits of currency union with Australia or the adoption of the US dollar.

Doing this, so the arguments went, would lower the cost of doing business with one, or the other, of our major markets and reduce the volatility of the currency. If nothing else, Greece's plight should end such talk. For every advantage of currency union there is a corresponding disadvantage.

In the early days of the euro, Greece benefited from cheap credit and a reduction in trans-border transaction costs, not that it seems to have taken constructive advantage of either opportunity.

However, now that the Greek economy is in freefall, the country finds itself locked into an arrangement from which there is no apparent escape.

In the absence of euro membership the remedy to Greece's woes would be simple  allow the Greek currency to settle at a level that recognises the weakness of the Greek economy. The costs of imports, including fuel, medicines and luxury goods, would rise and so would the cost of overseas travel but, overnight, Greek business would become more competitive and Greek workers more employable. Over time a new economic equilibrium would be established.

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However, while Greece remains a member of the eurozone that cannot happen. The value of its currency is determined not by its economic performance but by the performance as a whole of a region dominated by Germany's industrial engine.

For now at least Greeks have decided that the costs of quitting the euro exceed the costs of retaining it, but it is a close run thing. The unthinkable is edging closer.

- The Dominion Post

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