Feldstein: Greece To Quit Euro, And Default

Martin Feldstein, the Harvard University Professor who said two decades ago that the euro would prove an economic liability has finally said what everyone knows: It is not possible for Greece to go from a 12% deficit now to a 3% deficit two years from now. It is just fantasy.

“The alternatives are to default in some way or to leave, or both.”

According to Bloomberg today, Billionaire George Soros said last month that the euro “may not survive,” and credit default swaps indicate a 22% chance Greece will default within five years.

Feldstein says that the Euro rules generated a “very strong bias toward large chronic fiscal deficits”.

Feldstein says that "Greece will ultimately need to mull alternative ways to tackle its crisis, possibly by finding a “polite way” to default, which might include persuading investors to swap maturing bonds for longer-term assets at lower interest rates and/or leaving the euro area to devalue and then returning once the fiscal weaknesses are solved.

“I don’t know that there’s a good solution to this problem,” Feldstein said.

‘Proved Wrong’

“American economists such as Marty have been proved wrong for a decade and will be proved wrong for the next decade,” said Wyplosz, who predicts that a Greece exit would trigger a “total collapse of the Greek economy.”

Feldstein stands by his analysis that it’s not “unthinkable” some countries may choose life outside the euro area. Leaving is “certainly possible, and in part it can happen even if all the economic advice to a government is, ‘You shouldn’t do this,’” he said. “Politicians don’t always listen to their economists.”