Friday, March 19, 2010

Win-Win Scenario for the Eurozone: Expel Greece, Invite Poland

I am increasingly convinced that it would make a lot of sense for the euro zone to do a quick barter trade and replace Greece with Poland. It would be a pure win-win, a Pareto-efficient solution for everyone:

(i) Greece would have a chance of restoring its competitiveness owing to a new depreciated currency (otherwise it will have to go through a grinding, painful and long-term internal devaluation, which I think the Greeks--unlike Latvians, Estonians, Lithuanians, and Bulgarians--have no stomach for);
(ii) Poland would achieve the macroeconomic stability that it craves and accelerate the speed of convergence (particularly if it joins the euro zone at roughly the current exchange rate)
(iii) euro zone would get a new powerful member, whose low inflation (projected to decline below 2% later this year) and relatively low public debt (at least compared to Western Europe) would not complicate euro zone policy making, while its strong competitive position would provide the much needed stimulus to the sclerotic eurozone economy.

I will give this idea some more thinking and report again soon.

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