Many analysts have suggested that Greece would be better off if it could exit

Many analysts have suggested that greece would be

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Many analysts have suggested that Greece would be better off if it could exit the Eurozone and issue a new national currency. A new national currency, devalued against the euro, could spur Greek exports and help growth return to the economy. As long as Greece is a member of the Eurozone, it does not have the exchange rate in its policy toolkit for responding to the crisis. Others, including the Papandreou government, argue that leaving the Eurozone would be a terrible economic decision for Greece, triggering a severe banking and financial crisis. Fifth, the Greek crisis has sparked a broader re-examination of EU economic governance, in order to improve the long-term functioning and stability of the currency union. The EU has been working on new legislation that would introduce significant reforms to economic governance. A proposed package of reform measures would strengthen enforcement of the Stability and Growth Pact, introduce greater surveillance of national budgets by the European Commission, and establish an early warning mechanism that would prevent or correct macroeconomic imbalances within and between member states. Sixth, Greece’s debt crisis has posed challenges to and opportunities for deeper EU integration. In some ways, the crisis has highlighted limits to EU integration, revealing fundamental disagreements between member states about how much EU integration is desirable and highlighting the power that member states, particularly Germany and France, still leverage compared to EU institutions. On the other hand, the crisis has spurred tighter integration, through increased powers of the ECB and the creation of a permanent European lending facility. Impact on US Economy Greece’s debt crisis could have at least five major implications for the United States. First is the exchange rate. Many expect that if investors lose confidence in the future of the Eurozone, and more current account adjustment is required for the Eurozone as a whole, the value of the euro will weaken. Already, the euro has depreciated in recent months against the U.S. dollar (Figure 2), falling by more than 15% between December 12, 2009 and May 7, 2010, (from 1.51 $/€ to 1.27 $/€). A weaker euro would likely lower U.S. exports to the Eurozone and increase U.S. imports from the Eurozone, widening the U.S. trade deficit. On the other hand, it will make purchases and U.S. investments in Eurozone countries cheaper in dollar terms. 19
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Second, the United States has a large financial stake in the EU. The EU as a whole is the United States biggest trading partner and hundreds of billions of dollars flow between the EU and the United States each year. Widespread financial instability in the EU could impact trade and growth in the region, which in turn could impact the U.S. economy. On the other hand, instability in the EU may make the United States more attractive to investors and encourage capital flows to the United States. However, if the crisis is contained to Greece, the effects on the United States would be smaller than instability throughout the EU as a whole.
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