Jayati Ghosh: What’s happening to Greece is in an interesting way what many developing countries have gone through. It’s really an inability to have independent monetary and fiscal policies, combined with a fact that during the boom it was chosen as a favorite destination, which creates a situation where you then become uncompetitive. Suddenly international finance look at you and decide that your prospects are not good, they pull out, and you have a currency crisis, which translates into a debt crisis and a financial crisis domestically. This is something that countries as far apart as Turkey, Ecuador, and Argentina have experienced. It’s relatively new in the developed world.
Prabir Purkayastha: Greece is at the heart of the European Union because it’s part of the euro zone. Do you think that the Greek crisis in that sense spells a problem for the European Union and the euro as a currency?
Jayati Ghosh: Yes. In fact, you know, the euro was always an unlikely currency, because the point is really that, since currencies are all about confidence, a currency has typically been backed by a state. So, the euro is the first successful example of a currency union without a political union. The difficulty is this: when you want adjustment, either you allow a specific region to use its own adjustment mechanisms through exchange rate devaluations, through independent monetary policy, or you have fiscal federalism, that is, the center steps in and saves, bails out, elements of the periphery. Now, the United States is another currency union. There are states in the United States — California, Florida — which are actually in worse financial positions than Greece; but they don’t have the same attack on the financial markets because the United States Federal Government is going to bail them out. What you don’t have in the euro zone is that same central government which is seen as a kind of ultimate sovereign backing. . . . It’s a very complicated situation for the leaders of the euro zone, essentially Germany but also I would say France. It’s complicated. Why? Because, if you bail out Greece, then you are sending a signal to other countries — called PIIGS now, Portugal, Ireland, Italy, Greece, and Spain — which are all broadly in the same region. They are in queue for potential bailouts because all of them have large fiscal deficits and large debts, which are sooner or later going to get pressured. So, they are sending a signal, and that of course means that the financial markets will be delighted to go and attack the Spanish and the Irish and the Italians and so on and so forth. So, there is a problem: if they bail out, they might have to bail out many more; can the finance of the euro area support it? If they don’t bail out, then, the euro zone will not exist. There’s really no choice.
Jayati Ghosh is Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, and Executive Secretary of International Development Economics Associates (IDEAs). This video interview was produced for NewsClick and released on YouTube on 3 March 2010. The text above is an edited partial transcript of the interview.