Devaluation can solve growing debt crisis, former finance minister says

Πέμ, 06/06/2013 - 11:00

Brno, May 21 (CTK) - The cure to the persistent debt crisis is currency devaluation, but only countries that are not euro zone members have this option, former finance minister and Civic Democratic (ODS) politician Vlastimil Tlusty said at an economic forum in Brno yesterday.

For that reason, some countries which have the euro now will soon stop using the currency, Tlusty said.

Tlusty rejected the illusory solution of the debt crisis in Europe that relies on cuts in state budget expenditures in the order of single figures of percent.

"For many years already it has been true that the economy of member countries cannot produce as much as the state budget needs. States, just like people, have become used to borrowing money for consumption. Debts are growing as a result and these borrowings cannot increase production, and consequently they cannot be repaid," Tlusty said.

Increases in taxes are also pointless, according to Tlusty.

There are two solutions to the crisis - either a cut in wages in the public as well as the private sector, or currency devaluation that would be dramatic and reach up to 30 to 40 percent.

"This will reduce the prices of services and increase the prices of imports, so that things whose production had been ineffective in a country until then will start to be produced there. It is a much more acceptable option than cutting wages," Tlusty noted.

He gave Greece as an example of a country that could devalue its currency. "It is a punishment for them to have the euro instead of the drachma. They could devalue it and Greece would again become tourists' paradise," Tlusty said.

"I believe they will have it (the drachma), but the later it happens the more expensive it will be for them," he added.

But Jiri Rusnok, a member of the government's National Economic Council (NERV) and an adviser to President Milos Zeman, opposed Tlusty's view at the forum.

Rusnok admitted that Europe's handling of its problems is laborious and often has little effect, but the effect of devaluation is uncertain.

"It is a solution that offers a quick hope that a country will start to grow, but objectively it becomes poorer and exports goods abroad below cost," Rusnok said.

"It is also necessary to have some value added when exporting, otherwise it might not help. Some countries went through several devaluations and it did not help hem," he added.

Tlusty and Rusnok differ in the opinion on euro adoption and the currency's future.

Tlusty says the Czech Republic must wait for some time to see what the euro will actually be like, while Rusnok believes the country should take steps so that it can enter the euro zone soon.

"Some countries will stop using the euro. The question is whether these will be countries such as Germany, or countries such as Spain or Italy. Then it is necessary to consider whether to adopt such a euro or not," Tlusty said.

In contrast, Rusnok claims that the euro zone will survive and the Czech Republic will benefit from a euro zone entry because of its orientation on foreign trade.

"It is a mistake to isolate oneself from the mainstream," Rusnok said.

Source: the Czech News Agency (ČTK), Prague Daily Monitor