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Paul Krugman, one of the most famous economists in the world, recently claimed in an interview with the BBC that Greece’s best option is to leave the Euro. Krugman stated, “Greece was seriously, seriously irresponsible even during the good years.” He compared Greece’s spending to those of the US and other European nations and claimed that the irresponsible spending was “not to the same extent.”
Krugman explained that the problem for Greece is that it cannot print its own money which gives it an “enormous vulnerability.” Therefore Greece has two options: accept the demands that Germany is imposing on them in regards to lending or to leave the Euro. Krugman declared, “Greece must and will leave the Euro.”
However, Krugman also points out that it is difficult for any Greek politician to say that Greece should leave. In fact, Krugman believes “whoever says, ‘that’s it’ will have ended his career.” According to Krugman, Greece leaving the Euro could happen in a couple of weeks depending on the outcome of the Greek elections. The other option is that the European banks will eventually refuse to lend to Greece which will force it to create its own currency again.
Ultimately Krugman claims that this is the most desirable thing for the Greeks and for everyone else in the Eurozone. He believes that the main ramification will be the fact that the Euro membership is reversible. The greatest worry is that there will be a run on the Spanish and Italian banks. However, as long as the European Central Bank is willing to supply the Euros for this run there should not be a major problem.
In another interview with the Independent, Krugman also went more in depth as to who should be blamed for the Eurozone crisis. Krugman believes that the Maastricht Treaty of 1992 is what originally caused this crisis because it led the way for the use of a single currency in Europe.
Michalis Sarris, chairman of the Cyprus Popular Bank also commented on the possibility of Greece leaving the Euro on 17 May 2012. Sarris claimed that Greece leaving the Euro was not “inevitable” but was a “clear possibility.”
Ultimately Cyprus hopes that Greece will recover without leaving the Euro because many of its finances are tied up in Greek investments. Sarris reported that the Cyprus Popular Bank suffered a loss of about 2 billion Euro do to the financial crisis in Greece. Sarris is hopeful and remains positive that Greece will be able to find a way out of this crisis without having to leave the Euro.
Paul Krugman is winner of the Sveriges Riksbank Prize in Economic Sciences (informally the Nobel Prize in Economics), Princeton professor, and a columnist/blogger for the New York Times. His books include End This Depression Now! and The Return of Depression Economics and the Crisis of 2008.