Greece and Milton Friedman’s case for flexible exchange rates

November 4, 2011

The deterioration of the Greek economy is not unique in the Euro-zone (EZ), only more acute than that of its peers. As discussed in our previous post on this topic, the flaw in the design of the Euro-zone (EZ) is one-size-fits-all monetary policy in a monetary union. Some get too much slack, when others need more of it.

In a centrally planned system, such as the US federal government, states that are lagging see their share of fed spending stable (in fact, increased through social benefits) whereas their contribution in taxes is comparatively reduced. It’s easy to understand, therefore, that this acts a counterbalancing mechanism in a downturn.

The EU’s remedy for Greece has centered on internal devaluation, a broad term that encompasses austerity and reducing wages. It has brought hardship but, so far, few of the  desired gain in competitiveness. The alternative route, advocated by Nouriel Roubini, is to exit the Euro and let the new currency depreciate. Competitiveness up, trade deficit down.

Let’s present the argument in the words of Milton Friedman. Read the rest of this entry »