The options for Greece and the Euro
Among Euro countries, Greece is seen as least creditworthy. It cannot "print" Euros -- that's the ECB's job. So, it cannot adopt a traditional Keynesian route to stimulus. Greece's nominal GDP will soon have shrunk 20%! They recently defaulted on debt, but must default once more on the 500 billion Euros still owed (of which 250 b is owed to European governmental organizations.)
They have started a little "austerity", but doing too little is a mistake: it drags out the recession, without fixing anything; and, in the end, everyone blames "austerity". The Greeks want the EU to help them out some more, while the EU (mainly the Germans) want the Greeks to do more to fix their economy.
The major options facing Greece and the EU today are:
Euro unravels: The real worry is that Spain, Portugal or Italy will follow Greece. A few weeks ago, Spain nationalized Bankia and is expected to rescue it with about 10 billion Euros. These other countries are at least pretending to do more than Greece, to bring their budgets under control. EU politicians and people do not want to see the Euro unravel. Emotionally, it feels like a huge step backward after decades of closer integration.
Some people suggest that the EU should let Greece go -- to punish the worst of the lot -- but then be ready to subsidize all others, if those others agree to some more austerity. However, the fear is that this may not work and that "contagion" will spread from Greece. Also, electorates in Spain might see decide they want to follow Greece..
Euro survives: The Euro can survive if the ECB agrees to backstop banks, with EU governments passing on losses to their taxpayers. This is how the U.S. handled its bank-bust. Perhaps Greece can be Europe's Bear-Stearns or Lehman. The ECB can let one bad player go, then back-stop all the others. However, politically, there is little to be gained by making an example of Greece if one is going to back-stop everyone else. So, why not back-stop all? This avoids the risk that letting Greece go will lead to more contagion than believed.
Historian Niall Ferguson has a good article arguing that this is the most likely outcome. He thinks Germany will lay down some conditions that give more power and control to the EU's central government -- one more step toward a United States of Europe. Having done so, he thinks Germany will agree to socialize the losses across Europe. He also thinks the U.K. will remain outside such a federal Europe.
My best guess is that Greece will not be kicked out of the Euro in this round of fear, but nor will Germany back-stop them permanently just yet. Chances are the can will be kicked down the road once more. However, this is like Russian roulette where there's only one shot in six that can kill, but it could be the next one.
They have started a little "austerity", but doing too little is a mistake: it drags out the recession, without fixing anything; and, in the end, everyone blames "austerity". The Greeks want the EU to help them out some more, while the EU (mainly the Germans) want the Greeks to do more to fix their economy.
The major options facing Greece and the EU today are:
- Greece leaves: goes back to the Drachma, but everyone else stays in the Euro
- Euro unravels: perhaps a few countries (Germany, Netherlands, etc.) keep the Euro, while most others leave
- Euro survives, keeping all its members
Greece leaves: Ladbrokes stopped taking bets on Greece leaving the Euro because not enough punters wanted to take the other side. Germany has drawn up plans to cushion a Greek exit. Non-Greek suppliers of oil, food will have a period where they don't know if and how they will be paid. The German plan will provide some funds so that the situation is kept manageable.
In isolation, this seems to be a good solution. There comes a time when a debtor clearly cannot pay back all he has borrowed. Re-negotiating the loan to a level the debtor can afford allows both sides to stop negotiating and get back to business.
In isolation, this seems to be a good solution. There comes a time when a debtor clearly cannot pay back all he has borrowed. Re-negotiating the loan to a level the debtor can afford allows both sides to stop negotiating and get back to business.
Euro unravels: The real worry is that Spain, Portugal or Italy will follow Greece. A few weeks ago, Spain nationalized Bankia and is expected to rescue it with about 10 billion Euros. These other countries are at least pretending to do more than Greece, to bring their budgets under control. EU politicians and people do not want to see the Euro unravel. Emotionally, it feels like a huge step backward after decades of closer integration.
Some people suggest that the EU should let Greece go -- to punish the worst of the lot -- but then be ready to subsidize all others, if those others agree to some more austerity. However, the fear is that this may not work and that "contagion" will spread from Greece. Also, electorates in Spain might see decide they want to follow Greece..
Euro survives: The Euro can survive if the ECB agrees to backstop banks, with EU governments passing on losses to their taxpayers. This is how the U.S. handled its bank-bust. Perhaps Greece can be Europe's Bear-Stearns or Lehman. The ECB can let one bad player go, then back-stop all the others. However, politically, there is little to be gained by making an example of Greece if one is going to back-stop everyone else. So, why not back-stop all? This avoids the risk that letting Greece go will lead to more contagion than believed.
Historian Niall Ferguson has a good article arguing that this is the most likely outcome. He thinks Germany will lay down some conditions that give more power and control to the EU's central government -- one more step toward a United States of Europe. Having done so, he thinks Germany will agree to socialize the losses across Europe. He also thinks the U.K. will remain outside such a federal Europe.
My best guess is that Greece will not be kicked out of the Euro in this round of fear, but nor will Germany back-stop them permanently just yet. Chances are the can will be kicked down the road once more. However, this is like Russian roulette where there's only one shot in six that can kill, but it could be the next one.
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