The road to Ithaca: the Gold Standard, the Euro and the origins of the Greek sovereign debt crisis

Harris Dellas () and George Tavlas

No 149, Working Papers from 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.

Keywords: international financial systems; current account adjustment; gold standard; euro area crisis; Greek crisis (search for similar items in EconPapers)
JEL-codes: F02 F32 F33 (search for similar items in EconPapers)
Pages: 40
Date: 2012-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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