T "The idea that Greece can go from a 12 per cent deficit now to a three per cent deficit two years from now seems fantasy," says Feldstein, referring to the country's plan to reduce its gaping GDP budget gap by four per cent this year and bring it to within EU guidelines of three per cent by 2012. Feldstein, 70, believes Greece's alternatives are to "default in some way or to leave, or both". The professor's diagnosis runs counter to that of ECB President Jean-Claude Trichet who says Greece's strategy is "convincing" and rejects the idea that it may be forced out of the euro as "absurd". But his thinking is broadly in line with prominent investors, including George Soros, who believe the euro itself may not survive. Feldstein, 70, a former contender to chair the Federal Reserve and adviser to successive US president since Ronald Reagan, first suggested the euro bloc could splinter more than a year ago. Philip Lane, an economics professor at Trinity College Dublin, disputes this view: "He has more reason to think he's right than five years ago ... but the euro area will absolutely not break up." The warning of further turmoil came as European governments established the outline for a financial lifeline to Greece, a crucial reversal of euro economic policy. The credit agency Standard & Poor responded by removing Greece from "creditwatch negative". Feldstein believes Greece will need to find a "polite way" to default. Possible options include leaving the euro area to devalue and then returning when the situation improves. Charles Wyplosz, a former student of Feldstein's and director of the International Center for Monetary and Banking Studies in Geneva, told Bloomberg News this solution was not simply impractical but would create the equivalent of moral hazard by giving other weaker euro members - the so-called PIIGS - no reason to restrain deficits or improve competitiveness. "American economists such as Marty have been proved wrong for a decade and will be proved wrong for the next decade," said Wyplosz. Greece could be forced to quit euro, says Feldstein
But other economists rubbish Martin Feldstein’s gloomy prognosis
Wednesday, 17 March 2010
LAST UPDATED 7:17 AM, MARCH 17, 2010
wenty years after warning the euro would prove an "economic liability," Martin Feldstein, the Harvard University economics guru who sits on President Obama's Economic Recovery Advisory Board, is sounding a new alarm: Greece's austerity plan will fail to fix its
budget deficit crisis and the country may be forced out of the euro.
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