Pissing Down Your Leg

Thoughts on Economics and Economic Policy

Sovereign Debt and Eurozone Exit

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So my previous post ignored the 800-lb gorilla in the room, namely sovereign debt. The goal of exiting the eurozone would be to make your economy more successful and allow monetary policy that is appropriate for your national economy. If successful, this will lead to reduced unemployment and higher tax revenue. It will not solve chronic deficits.

So I believe that sovereign debt should be converted from euros to the new national currency at the shadow exchange rate. This would avoid a European-wide banking crisis as investors should be indifferent between the old debt in euros and the new debt in lira (or pesetas or drachmas). But it wouldn’t solve the Greek problem of continuous deficits due to overspending and poor tax collection. I don’t believe there is any monetary solution to that issue. It should, however, greatly help countries like Spain and Italy which have not been financially profligate.

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Written by Liam C Malloy

May 11, 2012 at 9:06 am

Posted in Eurozone

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