The Elephant’s Habitat is Elsewhere

by Shihang

Krugman talks about the optimal currency zone, and while his point is very valid, I wonder whether the problem is in fact too little EU intervention, not too much. While the problem in Greece could have been mitigated by not having a common currency, revising the exchange rate downwards to reduce debt is irresponsible, and may contribute to a loss of stability in investment. Better EU controls on member states’ finances could have prevented this crisis as well.

I personally find it convincing to compare the Eurozone to the USA, which has a federal government employing a single currency across 50 states. From this chart, California’s finances are different from Arizona’s, yet few would call for different currencies for each state so Schwarzenegger can simply revalue the Californian exchange rate to get rid of a $1823 per capita deficit (in 2007, before its debt crisis). Similarly, Greece could benefit from some austerity measures as a remedy, but a better policy would have been for the EU to watch its member states’ finances more carefully.