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March 5, 2012

Why Greece Should Learn from Iceland, Leave the Euro Zone

Greece should leave the Euro, print its own currency, and solve its economic problems independently. The bailout package carries too many risks to the country, euro zone, and the global financial community. In the event of an escrow account cutoff, a disorderly default would occur, and due to the unexpected nature of the default, the financial markets would be rattled.

The other factor not being discussed in all of this is the micromanaging of the Greek economy by other Eurozone members. It's one bad idea for the home country to try to micromanage its own economy, but to do so to another country? The bailout-escrow relationship is a disaster waiting to happen.

By leaving the euro, Greece can get the default out of the way, and perpetuate the end of the slow moving train wreck that has been the past three years. Additionally, Greece can get back to managing its own currency and hopefully increase trade via the low value of its currency.

A good example of this is Iceland. Iceland's krona value to the dollar fell by 50 percent following its financial crisis 2008-09. The country's export industries helped the economy recover, and in Q3 2011, the economy grew by 5.1%, which is more than any other euro-based economy in that quarter.

Greece could print its own currency, force itself to a balanced budget (because it won't have outside financing), and encourage its exporting industries to conduct international business. The depreciated value of the currency can encourage trade. Miller-McCune wrote an excellent article on this topic.

While Greece struggles, Iceland recently received a credit upgrade. While Iceland's reaction hasn't been fully vented, it's certainly something to watch closely over the next few years.

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