February 15, 2010

Greece Shows Euro Isn’t Working

Harvard’s Feldstein Says Greece Shows Euro ‘Isn’t Working’

February 12, 2010
Business Week
By Simon Kennedy and Thomas R. Keene

Feb. 12 (Bloomberg) -- Harvard University Professor Martin Feldstein, who warned in 1997 that European monetary union would spark greater political conflict, said Greece’s fiscal woes expose the fault lines of the single currency project.

A day after EU leaders promised “determined and coordinated action” to help Greece control its budget deficit, Feldstein said the weakness of having a single monetary policy and different fiscal policies is being revealed.

“It isn’t working,” Feldstein, 70, said today in an interview on Bloomberg Radio. “In Europe, they have a single monetary policy and yet every country can set its own fiscal and tax policy.”

Feldstein said European governments will have to find a new way to ensure budget deficits don’t get out of control.

“There’s too much incentive for countries to run up big deficits as there’s no feedback until a crisis,” he said.

While the European Central Bank sets interest rates for the region’s 16 economies, the practice until now has been that each country has to steer its economy and can set its own tax and spending policies.

In his 1997 article, Feldstein wrote that while it’s impossible to predict whether political clashes will lead to war, “it is too real a possibility to ignore in weighing the potential effects” of monetary and political union.

See also: Wall St. Helped to Mask Debt Fueling Europe’s Crisis