Greece and the Euro

by Gary S. Becker

The Becker-Posner Blog
November 6, 2011

I will discuss the following two crucial questions about Greece and the euro:

Should Greece have become part of the euro? No.

Should Greece leave the euro? Not now, but probably in the future.

Greece initially gained many apparent advantages from becoming part of the euro zone. The Greek government could borrow on the international capital market at interest rates that were only a little above the rates paid by Germany, the strongest EU economy. These low rates probably reflected a belief among investors that the strong members of the EU would support investors in the weaker economies if these economies ran into financial difficulties. Being part of the euro zone also led to easier access of Greek goods and services to the markets of other euro members, especially France and Germany. As a result, Greek GDP grew at good rates until the financial crisis hit.

However, being part of the euro zone created many problems for the Greek economy that only surfaced after the financial crisis began to take its toll. Since the cost of borrowing was low, Greece borrowed a lot from banks in France and Germany, and also from domestic banks, to finance a bloated government sector that had too many employees who retired early and did not have to work hard. It also had an inefficient and ineffective tax system that did not raise enough revenue to finance its ambitious spending programs. The government continued to operate inefficiently railways, mining and vehicle companies, and enterprises in many other sectors. Moreover, little effort went into reforming labor and product markets to make them more competitive and flexible.

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