Here is a very interesting article and below is a comment on it.
Krugman’s comment is perfectly correct in as much as it relates to the US because the US is – as far as I know – the only country in the world which has its foreign debt in a currency which they can print themselves. Other than that, the following sentence applies to members of the Eurozone: “The key constraint introduced by the euro is a different one: competitiveness can no longer be restored through exchange rate depreciation”.
In the absence of a local currency restoring competitiveness, the only other variable is the local standard of living. If Greece – as economists have calculated – has become roughly 40% more expensive relative to Germany since the Euro, then Greece has to become cheaper in the same proportion. They call that deflation (as the new adjustment variable). Deflation of 40%? Good luck to democracy!
It is no good to send a mediocre soccer player to Real Madrid and admonish him to improve his game so that he doesn’t get kicked out of the team. There is no way that a country like Greece can, in the shorter term, play level field in a Eurozone with the freedoms of movement of goods, services and capital. If they are forced to do that, they will transfer their capital to, say, Switzerland and buy their goods at cheaper prices in Germany.
Had one known at the time of the Euro’s introduction what one knows now, one would probably not have exposed Greece so quickly to the free movement of goods and capital, particularly when there would be nearly unlimited supply of foreign loans to finance that free movement (imports into and capital outside the country). That is now “spilled milk” and should be considered as a learning experience.
A country like Greece needs above all development aid in the form of know-how. It needs to learn that loans from abroad should primarily be used for domestic investment in projects which generate revenues on a sustained basis. Instead of importing all the consumption products which it needs (or may not even need), the country has to learn (again?) to produce more of its consumption needs domestically (or not consume them). If it needs some temporary protection for “infant industries” (import taxes), why not?
Finally, the country needs to learn that every people is allowed to be as little productive as they wish. That is not the problem, not even with a common currency. The problem begins when people who treasure little productivity want to have the same standard of living as workaholics. That won’t work (particularly with a common currency).
How does one explain that to a country? Either overnight by allowing it to leave the Eurozone (and by waiting for anarchy to unfold). Or by really “helping” a country to develop its potential on its own. The latter takes time (many years, if not a generation) and dishing out new loans from tax payers so that maturing loans from private lenders can be repaid is certainly no “help”.