Watching the Greek news daily on (satellite tv) has convinced me of a communication issue. Admittedly the Greek government has its hands full with the PSI “haircut” and the troika demands. But it assumes that the average citizen knows enough economics to realize that the only choices right now for boosting competitiveness are exit from the euro and serious devaluation of the drachma or euro retention and serious internal devaluation, unfortunately through substantial reductions in labor costs. As we argued in earlier postings, even though this comes down to a political decision, economists would mostly agree that staying in the euro is more beneficial for the long run, unless Greece ends up having no choice. If clever journalists cannot get this, why does the government assume that everyone else can?
Do markets know best? You may argue so. What the Europenas did not do by themselves through their common monetary and interest rate policy, the markets have done for them. Given the state of the European economy as a whole and the problems facing the PIIGS, one might argue that the euro should have been devalued against the dollar some time ago. Isn’t this a blessing for German exports too?