Greece and the euro: a Mundellian tragedy

This paper analyzes the process of destabilization, crisis and adjustment in the Greek economy since the accession of the country to the European Union and, subsequently, the euro area. It reviews four policy cycles of the past 40 years, the four acts of the Greek tragedy, and discusses alternative ways forward, following the sudden stop and the great depression of the 2010s. It concludes that despite the significant constraints implied by continued participation in the euro area, namely a stark Mundellian conflict between internal and external balance, exiting the euro area risks further destabilizing the economy and bringing about a return of the problems of the 1980s. The current challenge for Greece is to seek to remain and prosper in the euro area. This would require a policy mix based on supply side reforms which would allow for a sustained recovery without the reemergence of external imbalances.