Four Economic Myths that Perpetuate the Euro Crisis

by Patrick Barron at Mises Institute

Too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. Meanwhile, the Greek government has borrowed more money than the Greek people can possibly repay, and debased money will not make this fact disappear. On the contrary, more easy money will cause even more harm.

The best thing that Europe and Greece can do for itself right now is to confront some of the economic fallacies that have long driven the debate over Greece, the euro, austerity, and debt. Here are four fallacies that are among the most damaging:

1. The Euro Is Too Strong a Currency for Greece

This statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.

Well, there is a semester’s worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold

Source

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