Thursday, September 22, 2011

Greece to stay in the Eurozone by destroying its economy

Greece slashes more jobs and spending as it vows to stay in eurozone | Business | The Guardian:

That should do the trick... But seriously, exactly how does this help Greece stay in the Eurozone? The inevitable consequence of this policy is a deeper recession, and markets know this and will price Greek debt accordingly. Since austerity will neither reduce the deficit (because of its devasting effect on the denominator) nor reassure the markets, how does it help Greece stay in the Eurozone?

My suspicion is that the only 'positive' effect of this austerity to reassure German voters that Greece is truly suffering, and therefore not escaping its due punishment for fiscal misdeeds. If that is indeed the mechanism, then we have officially installed a penal system in place of a monetary union.