NYU Stern Finance & Economics professors have co-authored a new op-ed in the Huffington Post. In “The Euro Exit,” Tom Cooley, Matt Richardson and Kim Schoenholz explore history to analyze the crisis that Europe would ensue in the event of Greece’s exit.
Excerpt from The Huffington Post:
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This Sunday, June 17, Greeks once again will go to the
polls to elect a new leader. Unlike the past when elections were all about the
right versus the left side of the political spectrum, this one is about whether
Greece should stay in the European Monetary Union (EMU) and implement the
necessary austerity. The threat of an imminent Greek exit from the euro is
self-evident.
Unfortunately, policymakers in the eurozone underestimate
how difficult it will be to hold the remaining euro area together if Greece exits.
Greece is playing a massive game of chicken with its EMU partners, and could
still win.
The reason is that the euro area was designed to be
irreversible. The foundation of EMU, the Maastricht Treaty, makes no provision
for exit. This commitment constitutes the critical difference between EMU and
other fixed exchange rate regimes from which countries can (and routinely do)
exit.
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Fixed exchange rate regimes are inherently unstable in a
world of free capital flows. To make them work, policymakers must commit
credibly to act in the future in ways that will on occasion prove wildly
inconsistent with their future preferences. Economists call this the problem of
time consistency: making such commitments credible is not always feasible.
It is not as if Europe hasn’t gone through this before.
Read the full article here