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FT: Why Greece Will Have to Leave the Eurozone

Author: Desmond Lachman
January 11, 2010

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According to Desmond Lachman of the American Enterprise Institute, Greece is approaching the final stages of its currency arrangement. There is every prospect that within two to three years, after much official money is thrown its way, Greece's euro membership will end with a bang.

The first stage on the road to a currency crisis occurs when a country, motivated by the desire to import policy discipline from abroad, adopts a fixed exchange rate to which its economy is patently ill-suited. A serially defaulting Argentina did so in 1991, when it adopted a convertibility plan that rigidly pegged the peso to the dollar in the vain hope of ending its tendency towards hyperinflation.

After failing to meet the criteria for euro membership at the currency's 1999 launch, a chronically profligate Greece managed to qualify in January 2001 by engaging in creative budget accounting. Going an important step further than Argentina, Greece abandoned its currency in favour of the euro. It joined a club whose very founding envisions no exit option for any of its member countries.

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