Friday, July 20, 2012

Knotty problems

There is an excellent article on the Greek economic crisis in the Wall Street Journal from Marcus Walker and Marianna Kakaounaki.

Walker and Kakaounaki look at the impact of 'internal devaluation' on the real Greek economy. This is a brief summary of their argument: 

The IMF admit that the conditions are probably wrong for internal devaluation to work, yet continue to press it on Greece. Export businesses need internal devaluation to increase competitiveness to be able to export. In the meantime internal devaluation is sucking domestic demand out of the economy, thereby hampering the development of the necessary infrastructure for domestic growth and for those self-same export businesses. Borrowing and lending costs are too high and confidence is too low. Whilst tourism, one of the biggest earners of foreign exchange, is less competitive due to the exchange rate. What a tangled mess. They reckon that,

If the euro zone unravels, the deeper reason won't be fiscal indiscipline or political dithering. It will be because struggling nations' euro membership, coupled with Germany's approach to its own economy, leaves them with a route to recovery that some economists say is barely feasible—socially, politically or financially.
Instead of admitting their failures and dealing with the real problem, the EU seem to be following a time-honoured military strategy. Urge the poor bloody infantry in the front line to make increasing numbers of futile sacrifices, whilst securing the home front from the consequences of the inevitable defeat. It never works.

I hate to come over all classical about this, but isn't it Gordian knot cutting time?

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