Thursday, May 17, 2012


"What would constitute an economically rational choice for Greece, given the economic and political situation? I see four options, each of which is fraught with uncertainty. The first would be the status quo: more austerity and economic reforms as outlined by the International Monetary Fund and the EU. One risk is that this would keep Greece in an eternal depression and a debt trap, where economic output fell faster than growth. Another is that, while on paper it might just work economically, it would almost certainly fail politically.... The second option would be to pursue the same plan until Greece achieves a primary balance – the fiscal balance before the payment of interest – and then to default, or at least to renegotiate the programme with the IMF and the EU. This is more realistic than the first option. A variant of this option was under discussion in the negotiations last week. But there is a risk the austerity needed to reach this point is either so severe, or would take so long, that the political risk would start to have an impact as well. The third option is the one outlined by Alexis Tsipras, the Syriza leader. He wants Greece to cancel the programme immediately, reverse some of the reforms and consider the possibility of a default on the remaining foreign debt. He claims this would not lead to an exit from the eurozone. He is saying that the EU is bluffing. I am not sure he is right about the latter. But then again, I am not sure he is wrong either. What would happen if Greece cancelled the programme unilaterally? For a start, the EU would stop the loans to Greece. Greece would then default on all of its foreign debt. But given the primary deficit, Greece would have to impose an even bigger austerity programme. Assuming it still wanted to stay in the eurozone, could the others force it to leave?... The fourth option would be an immediate voluntary departure. Greece has only a tiny export sector and, as Willem Buiter of Citibank has said, the initial competitiveness gains would be quickly eroded through domestic policies. Of the four, the worst option is actually number one. By following the EU-IMF programme, Greece will end up with 10 years of depression, an inevitable euro exit and a possible breakdown of democracy. The best option, in my view, would be a strategy to achieve a primary balance by 2013 and then to default on all outstanding foreign debt, public and private. It would not be popular outside Greece but it would be hard to push Greece out of the eurozone. I consider Mr Tsipras’s approach too risky. But I can see why Greek citizens would vote for him. His position is certainly more rational than that of the austerity centre-ground establishment, which can offer no perspective of an economic turnround. This is Germany in the early 1930s all over again. This leaves us with a choice between default later and default now. I would prefer default later because it would make for a smoother fiscal adjustment, bring a few sensible reforms and increase the probability that Greece could stay in the eurozone. Sadly, the political momentum is swinging the other way".
Wolfgang Munchau,"Default now or default later?" The Financial Times. 13 May 2012, in
"Here lies the crucial point for Europe's single currency. Those countries under the most severe fiscal pressure will obviously wish to print money sooner and faster than those better situated. Yet the Maastricht Treaty effectively rules out printing money; Article 104 of the treaty (now Article 101 of the Statute of the treaty establishing the European Community) and Article 21 of the Statute of the European System of Central Banks enshrine a strict 'no bail-out' rule. Member states that hope to inflate away their debts will simply be turned away. Much more likely is a series of collisions between national governments struggling to bring their finances under control and the ECB.... The Political will to implement spending cuts and tax increases may be strengthened by these considerations. Still history offers few examples of successful adjustments on the scale necessary in certain European countries today. What it does offer are several examples of monetary unions disintegrating when fiscal strains became incompatible with the unpleasant arithmetic of a single currency. In this respect, conventional measures of fiscal balance like debt and deficit ratios to GDP understate the magnitude of the eurozone's problems. Generational accounting suggests that EMU could degenerate-not overnight, but within the next decade."
Niall Ferguson & Lawrence J. Kotlikoff, "The Degeneration of the EMU." Foreign Affairs. (March / April 2000), pp. 120-121.
Wolfgang Munchau's newest piece in the Financial Times, provides the reader with a series of unpleasant to catastrophic scenarios for Greece and the Eurozone. Judging from the various options that he throws up, the most best one is for a default on all foreign loans, public and private, as soon as Greece manages to achieve the fabled 'primary balance'. Unfortunately, as he himself seems to realize, the same politicians (if one can label them that), who are willing to play va banque with defaulting, are completely unwilling to stick to the necessary reforms in the Greek public sector, which would enable Greece to achieve anytime soon a primary balance. The fact is, that if the Greek electorate chooses to re-elect a parliament which is unable or unwilling to adhere, to some of the more rational aspects of the austerity programme and instead wishes to default immediately on Greece's foreign debt, then the best scenario perhaps is for Greece to do so and face the ultra-unpleasant music. Unpleasant it will most definitely be. Admittedly, not as unpleasant as the music, that our modern-day Heinrich Brunnings are endeavoring to administer to Greece and the other peripheral countries of the Eurozone. The whole scenario and problem of these past three years, merely throwing into relief the issues raised by Niall Ferguson twelve years ago in his Foreign Affairs piece. Unfortunately, the pay-master of the Eurozone, Germany has like the Bourbon's circa 1815: "Ils n'ont rien appris, ni rien oublie.


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