If Greece were not part of the Eurozone, its exchange rate with the rest of the world would adjust over time to prevent this type of large and growing trade deficit. More specifically, the need to finance that trade deficit would cause the value of the Greek currency to decline, making Greek exports more attractive to foreign buyers and encouraging Greek consumers to substitute Greek goods and services for imports. The rising cost of imports would also reduce real personal incomes in Greece, leading to less consumer spending and freeing up Greek output to be exported to foreign buyers.
Wednesday, November 30, 2011
Will the EU break apart?
Martin Feldstein (paper) suggests that Greece and some of the other PIIGS (Portugal, Italy, Ireland, Greece and Spain) may be better off leaving the Euro: