Tags: Feldstein | Greece | Repair | Euro

Harvard’s Feldstein: 'Greece is Beyond Repair,' Should Work on Leaving Euro

Friday, 08 June 2012 12:48 PM EDT

The Greek economy is "beyond repair" and policymakers there and across Europe should focus on the best way to show the country the door to the eurozone, says Martin Feldstein, a Harvard economist and head of the Council of Economic Advisers under President Ronald Reagan.

"I think Greece is beyond repair," Feldstein tells CNBC.

"The best situation for Greece is to leave the eurozone, devalue a new currency, and be able therefore to grow again."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

The Standard & Poor's ratings agency gives Greece a one-in-three chance of abandoning the euro and reverting to the drachma.

Greece will hold elections on June 17, and many polls indicate that the left-wing Syriza political coalition may garner enough and abandon austerity measures such as tax hikes and spending cuts attached to rescue funding.

The European Commission, the European Central Bank and the International Monetary Fund arranged the euro equivalent of over $170 billion in bailout funding earlier this year provided Greece accept austerity measures and streamline its government.

Ditching austerity could mean an end to rescue funding and an end to Greece's days in the eurozone, which might not be a bad thing.

"Letting Greece go will be painful in the short run but will be better for Greece, and for Europe, in the long-run," says Feldstein.

Turning to Spain, which is working to prop up its banking sector and addressing calls from regional governments such as Catalonia to help refinance local debts, Feldstein says the latter serves as the bigger problem.

"The big problem for Spain is not a banking problem in the long-run. It is the individual regions," Feldstein says.

"They have fiscal independence that has allowed them to create large budget deficits, and that has to be controlled."

Meanwhile in the U.S., the Federal Reserve remains on standby and might move to stimulate the economy should the European debt crisis escalate and threaten U.S. recovery.

"The Federal Reserve remains prepared to take action as needed to protect the U.S. economy in the event that financial stresses escalate," Fed Chairman Ben Bernanke told the congressional Joint Economic Committee.

Such a statement, however, wasn't enough to convince markets that the Federal Reserve was any closer to rolling out large-scale bond buybacks from banks to jolt the economy, which would send stocks rising and the dollar weakening.

"It doesn't really settle the debate," says Vassili Serebriakov, senior currency strategist at Wells Fargo, according to Reuters.

"There was some hope for more concrete signs, a clearer hint, that further easing is forthcoming, and I don't think we got that."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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Friday, 08 June 2012 12:48 PM
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