Harvard University Professor Martin Feldstein, who warned in 1997 that a European monetary union would spark greater political conflict and that a single Euro-zone currency would prove an ‘economic liability,’ said Greece’s austerity plan will fail and the country may quit the euro to fix its fiscal crisis.
According to Feldstein, the notion that Greece has a workable plan to cut its soaring budget deficit from 12.7% to below the EU’s 3% of GDP limit by 2012, is unrealistic.
Bloomberg: “The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy,” Feldstein, a former contender to chair the Federal Reserve, said in a March 13 interview in Geneva. “The alternatives are to default in some way or to leave, or both.”
Feldstein’s argument has been rejected by European Central Bank President Jean- Claude Trichet who has expressed confidence Greece can get its budget deficit under control. Mr. Trichet, has not only rejected as ‘absurd’ any speculation Greece might leave the euro block, but through his continued support for the country’s latest austerity package has suggested that Greek debt should remain acceptable collateral to obtain cheap ECB credit beyond this fiscal year.
Investors nevertheless aren’t ruling out Feldstein’s analysis. Billionaire George Soros said last month that the euro is “being severely tested” and may disintegrate as a result of the Greek deficit crisis.
Greece is set to become the EU’s most indebted country this fiscal year, with debt rising to nearly 125% of gross domestic product. The country’s debt burden has raised serious questions and increased market speculation about whether Athens can service its obligations.