Greece has 50-50 chance to leave eurozone: Nobel laureate

3rd June 2010, Comments 0 comments

Nobel prize winning economist Paul Krugman raised doubts Thursday over a rescue plan for debt-stricken Greece which he believes still faces a 50-50 chance of ejection from the eurozone.

"Through monstrous sacrifice, what Greece manages to do over the next five years is increase its debt from 115 to 140 percent of GDP (Gross Domestic Product)," Krugman told the Swiss Economic Forum, referring to a 110-billion-euro rescue package drawn up by the IMF and European Union in May.

"And for some reason, we're supposed to believe that as of 2015, Greece regains access to the (financial) markets and everything is fine. I don't quite understand why that's supposed to work," said the Princeton University academic, who won the Nobel Prize for economics in 2008.

Greece is paying a painful price for past overspending, with the government forced to slash civil servants' pay and pensions while raising taxes.

Krugman said eurozone countries are unable to envisage leaving the single European currency because "to do so would be to invite massive bank runs" as nervous investors tried to get hold of their money.

"But what if the bank runs happen anyway?" he asked, pointing to the debt crisis in Argentina in 2001 when banks were forced to close. "Once you've done that, the possibility of exiting the single currency arises.

"I would say that there is about a 50-50 chance in the case of Greece that something like that will happen -- that we'll finally see it ejected from the euro."

A top German economist also cast doubt over drastic cuts in wages and prices in Greece.

"The politicians want ... to make the country competitive again through a savings solution," Hans-Werner Sinn, head of the Ifo institute told the forum.

"This solution is the road to civil war in Greece. It is not possible.

"The only possibilities are that we give to Greece this money that they cannot repay, or it leaves the euro.

"These are not nice solutions and qualifies it as a Greek tragedy," added the economist, who is also one of the top advisers to the German government.

Meanwhile, Krugman said Europe needs to make dramatic policy changes to emerge from the debt crisis, including "wrenching changes on the part of periphery countries."

"There will almost certainly have to be more fiscal integration," he said, referring to a centralisation of powers on eurozone economic policy.

The economist noted that with the end of the financial and economic crises and a slow recovery, the world is now in "act three of the crisis" -- when countries have to tackle a mountain of debt.

"I don't know whether this play is a tragedy in the end or not. Act three is looking extremely difficult."

© 2010 AFP

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