How that would work, logistically, is unclear to me. Introduce a new currency, devalue it, then go back to the Euro at the new exchange rate? It seems that Marty is mainly trying to figure out a way to rewrite wage contracts with a new lower level of nominal wages.
I think Mankiw gets it right. But, in all honesty, it wasn’t all that hard to figure out the goal of Feldstein’s proposal. He’s about as clear as can be that the solution to the crisis should be based on squeezing Greek workers.
Greece faces the difficult task of lowering the prices of its goods and services relative to those in other countries by other means, namely a large cut in the wages and salaries of Greek private-sector employees.
And that’s what, in his view, the “temporary leave of absence” would help to impose.
A temporary leave of absence from the eurozone would allow Greece to achieve a price-level decline relative to other eurozone countries, and would make it easier to adjust the relative price level if Greek wages cannot be limited.
The real question is, why was Mankiw perplexed at all? He and Feldstein share the same macro model in which all the necessary adjustments occur in the labor market. It’s all about decreasing real wages.
In Marxian terms, the goal is to increase the rate of exploitation. That’s what neither Mankiw nor Feldstein is willing to admit.