Friday, September 3, 2010

The EU can be a boon for Greece

by Paul Romer

Financial Times
September 2, 2010

At first glance Greeks seem cursed by the EU. Their membership precludes an exchange-rate devaluation, the traditional way out of a financial crisis. But, on closer inspection, the EU offers a far more potent option. Corruption in Greece is like the worst kind of tax; one that discourages economic activity without raising revenue. Yet Greek policy-makers should be able to use the credibility of the EU to cut this tax decisively.

Greece is actually making progress with its budget problems. The IMF on Thursday released a report saying a debt default was “unlikely”, while another recent IMF review was upbeat on the government’s fiscal measures. Yet as Monday’s report on European economic sentiment shows, households and businesses in Greece remain deeply pessimistic. Even if the government can pay its bills, they face a deeper problem: Greece is not an attractive place to get work done.


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