Abstract

THE ROAD TO ITHACA: THE GOLD STANDARD, THE EURO AND THE ORIGINS OF THE GREEK SOVEREIGN DEBT CRISIS

Harris Dellas

University of Bern

George S. Tavlas

Bank of Greece

ABSTRACT

The origins of the Greek-sovereign debt crisis were the country’s large fiscal and external imbalances. The key factor that abetted those imbalances was the absence of a short-to-medium term adjustment mechanism -- due to perceptions of sovereign bailouts -- in the euro-area that would have reduced members’ external imbalances. This situation contrasts sharply with the adjustment mechanism under the classical gold standard. Under the gold standard, countries with external deficits would experience losses of gold reserves, higher interest rates, lower money and credit growth, and reductions in wages and prices, which helped restore trade competitiveness. We draw two main conclusions. First, the durability of a monetary union is crucially dependent on the existence of a well-functioning adjustment mechanism. Second, adherence to a hard peg is no panacea and cannot be sustained without the support of credible fiscal institutions.

JEL classification: F02, F32, F33

Keywords: international financial systems, current account adjustment, gold standard, euro area crisis, Greek crisis

Acknowledgement: Paper presented at the Cato Institute’s 30^th Annual Monetary Conference, Washington D.C., November 15, 2012. The views are those of the authors and not necessarily those of their respective institutions. We have benefited from comments from Elena Argiri, Hiona Balfoussia, George Chouliarakis, Michele Fratianni, Heather Gibson, Sofia Lazaretou, Patrick Minford, Angeliki Momtsia, Ifigeneia Skotida, Michael Ulan, Haris Vittas, and Emmanouel Zervoudakis. We are especially grateful to Elisavet Bosdelekidou, Dafni Giannikou and Christina Tsochatzi for excellent research assistance.

Correspondence:

George Tavlas,

Economic Research Department,

Bank of Greece, 21 E. Venizelos Ave.,

102 50 Athens, Greece,

Tel. +30210-320 2370