When Greece exits the euro.

• Author: Adams, Tucker Hart
• Position: The ECONOMIST

FOR MONTHS WE'VE BEEN BOMBARDED WITH endless articles on the crisis in Europe, the mounting problems in Greece, questions on the survivability of the euro and predictions that Armageddon twill ensue if the euro disappears. Don't misunderstand me--the situation in Europe is extremely serious and is hampering the U.S. recovery. But. whatever the ultimate resolution, I'm pretty sun' the sun will come up the next morning.

The problem faced by several of the nations in the European Union and to some extent here in the U.S. is huge federal budget deficits adding to an outsized federal debt. The solution that has been imposed on Greece is austerity * cut wages, cut spending, raise taxes. In theory that sounds like 2111 obvious solution.

The problem is that the more austerity is imposed, the more economic activity contracts. Tax revenues fall and demands on the social safety net rise, increasing the deficit and the debt rather than reducing it. As the government imposes still more austerity. social unrest increases.

As much as I am in favor of low taxes and limited government, I don't believe it is possible to shrink your way to prosperity. There is a time for government to intervene, as ours did during the Great Recession, thus avoiding a repeat of the 1930s.

What will happen when the Greek government accedes to the reality that the current policy is not working? The usual way to increase economic activity, and thus jobs and tax revenues, is to print money. thus devaluing your currency and increasing exports. 1310 Greece. as a member of the cum. has no currency of its own to devalue

So, the obvious solution is to abandon the euro and return to the drachma. There is no question that the transitional costs would he huge. Contracts would have to be redenominated; the banking sector would likely he wiped out: chaos would reign for a year or more.

Then what? Contagion, with country alter country fo1lowing Greece's footsteps? The end or the curt? A much smaller euro-zone close to its original size? The breakup of the European Union? A return to the devastating wars of the early 20th century?

Financial Times columnist Samuel Britten suggests an interesting alternative, a Europe of competing currencies. The euro might survive, particularly in shipping and finance, while local currencies would he used for tourism and exports...