Brad DeLong: Answers to Five Easy Euroquestions...

h/t Ζαχαρη

(1) Q: Who Should Eat the Losses from the Existing Greek Debt?

A: The German banks that made the loans to Greek politicians who did not have authority to impose taxes high enough to repay the debt--and the German government that backs the banks--should eat the losses from the existing Greek debt.

(2) Q: How Should Greece Balance Its Taxes and Its Government Spending Going Forward?

A: That's nobody's business but the Greeks'. It would, however, be nice if they would stop spending money like water in an attempt to maintain "strategic parity" vis-a-vis Turkey in the Aegean.

(3) Q: How Should Greece Balance Its Spending on Imports and Its Exports Going Forward?

A: Borrowing to cover the gap between imports and exports that exists at current exchange rates and price and wage levels is not going to happen, so Greece has a choice between (a) deep prolonged depression to make Greeks too poor to afford imports, (b) Grexit, devaluation, and a subsequent export boom, and (c ) Germans opening up the monetary spigots to produce higher inflation in northern Europe and meanwhile giving Greece an additional fortune to keep the pain in Greece low enough for adjustment to take place within the Eurozone framework.

(4) What Will Happen If Greece Exits the Euro?

A: Germany will then have a choice between (d) a Great Depression in Europe, and (e) a much bigger inflation in Europe and a much larger fortune given away to cushion adjustment than would be needed to make (c ) work.

(5) We Will Then See (c ), Right? Germans Opening Up the Monetary Spigots to Produce Higher Inflation in Northern Europe and Meanwhile Giving Greece an Additional Fortune to Keep the Pain Low?

A: Ha!!

http://delong.typepad.com/sdj/2012/06/answers-to-five-easy-euroquestions.html