Paris : Harvard University Professor Martin Feldstein, who warned almost two decades ago that the euro would prove an "economic liability," said Greece's austerity plan will fail and the country may quit the single currency to fix its fiscal crisis.
Under pressure from investors and fellow policy makers, Prime Minister George Papandreou's government is striving to knock four percentage points off its budget gap this year from 12.7 per cent of gross domestic product and has vowed to meet the EU's three per cent limit in 2012 for the first time since 2006.
"The idea that Greece can go from a 12 per cent deficit now to a three per cent deficit two years from now seems fantasy," Feldstein, an adviser to US presidents since Ronald Reagan, said in a March 13 interview in Geneva. "The alternatives are to default in some way or to leave, or both."
His diagnosis clashes with that of European central bank President Jean-Claude Trichet, who calls Greece's strategy "convincing" and rejects as "absurd" any speculation it might leave the euro zone. Investors nevertheless aren't ruling out Feldstein's analysis. Billionaire George Soros said last month that the euro "may not survive," and credit default swaps indicate a 22 per cent chance Greece will default within five years, up from 16 per cent a year ago.
The judgment of Feldstein, 70, a former contender to chair the Federal Reserve, marks his latest broadside against the single currency five years after he said its rules generated a "very strong bias toward large chronic fiscal deficits" and more than a year since he first suggested the 16-nation bloc may splinter.
He "has more reason to think he's right than five years ago, and it's natural to talk about limitations," said Philip Lane, an econ-omics professor at Trinity College Dublin. "But the euro area will absolutely not break up."
