Monday, June 20, 2011

There is none so blind ...

... as he who will not see.

This is a fair summary:
The European Central Bank will not countenance the idea of default. That just leaves deflation, and lots of it, as a way of putting the Greek economy back on track and ensuring the single currency remains intact.

This is a crackpot idea for two reasons. First, it runs counter to the basic principles of democracy; the Greek people are clearly not in the mood to bear the spending cuts, the reductions in wages and the sweeping privatisation being demanded of them by the European Union and the IMF as the price of a fresh bailout.

Second, deflation has already made Greece's debt problem worse and more deflation will make it worse still.
Larry Elliott arguing for the need of Greece to leave the Euro. The democracy point is well made here:
After Lehman, there was initial shock and uncertainty – but the collapse of stock, commodity and currency markets did not happen for a few weeks. That was when elected politicians were forced to choose between the demands of voters and markets, and went with the voters.
And there is a large measure of agreement from a Greek economic liberal:
Greece was bailed out to save European banks, not Greece itself, and that the bailout was only a temporary liquidity measure, when our problem is solvency. I explained back then that a massive recession was on its way and that there's no reason to expect anyone to lend to post-memorandum Greece who would not lend to pre-memorandum Greece, as the country will be more indebted and less capable of growth; hence the importance of reform. Finally, I pointed out in that interview that default has been historically proven to be a workable solution to a solvency problem and is an option for Greece. I still believe this, although people have to realise that timing the default is crucial and getting people to demand one right now is not going to help.
Even the IMF is starting to panic.
The International Monetary Fund warned European leaders that their hesitant response to Greece's debt crisis risked triggering the world's second global financial meltdown in three years.
So what is coming out of the EU?
Jean-Claude Juncker, Luxembourg's prime minister who chairs the meetings of the 17 eurozone finance ministers, said he felt for the Greeks: "This is something that affects me greatly. You look at the reaction of the people on the streets. You see they are rebelling. I understand that and I'm touched by that."

But he also said that there was no option but to keep to the existing plan: "There is no other choice than fiscal consolidation in Greece and in other fiscally weakened countries."
When will they wake up?

1 comment:

Manos said...

Thanks for the mention! For a hint of how far we need to take internal devaluation to achieve competitiveness, check out my thought experiment here: