''In recent months, some commentators have argued that Europe’s single currency project is destined to become unstuck. According to this line of reasoning, the fiscal crisis in Greece is unfailingly pushing that country towards an exit from its immutable fixed exchange rate arrangement within the eurozone. Greece, in other words, will suffer the same fate as all undisciplined countries that previously adopted hard pegs, such as Argentina in the early 2000s. Another Greek tragedy, so the argument goes, is waiting to be played out.This view is based on flawed reasoning. At the heart of Greece’s recent economic problems has been a loss of competitiveness since Greece joined the euro area in 2001. This loss is due to structural weaknesses, including fiscal profligacy in a period of robust growth when fiscal adjustment was called for, and a large government sector, up by 6 percentage points of gross domestic product (to 51 per cent) since Greece joined the eurozone. Rigidities in labour and product markets have contributed to persistently higher wage and price inflation than in the rest of the euro area, undermining competitiveness. Rising fiscal deficits have pushed up borrowing costs, adding to those deficits. The expanded public sector has eroded the export base and exacerbated inefficiency. The net result has been a twin deficit problem – large and unsustainable fiscal and external imbalances..''
The writer is governor of the Bank of Greece and a member of the ECB Governing Council, ''F.T.''read more..
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