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Wednesday, June 01, 2011

Greece leaving the EMU: From taboo to fashionable?

First it was the idea of eurozone bail-outs, then it was restructuring, now another eurozone taboo has been completely smashed: Greece leaving the Single Currency. In fact, over the past few days, it appears as if arguing in favour of Greece leaving the eurozone has become almost fashionable.

The speculation really kicked off when Der Spiegel revealed that a "crisis meeting" had been called in Luxembourg, following rumours that the Greek government was considering leaving the eurozone (although the main topic on the agenda for that meeting was probably restructuring and another bail-out package).

Despite the usual round of denials ("there's no meeting", "Greece is just fine", "Elvis is alive" etc) people are now falling over themselves to be candid. Greece's EU Commissioner, Maria Damanaki, for example. Becoming the first EU official to speak the unspeakable, she said,
The scenario of Greece's exit from the euro is now on the table, as are ways to
do this. Either we agree with our creditors on a programme of tough sacrifices
and results...or we return to the drachma. Everything else is of secondary
importance.
Clearly an attempt to put pressure on her countrymen to get on with business, but a bold statement nonetheless. And the last few days have seen a slew of politicians and commentators following suit. Writing in De Telegraaf, former Dutch Finance Minister Willem Vermeend argued that "Greece should leave the euro", given that it will never be able to pay back its debt.

In an interview with Handelsblatt, German FDP MP Frank Schaeffler - the standard bearer of the German no-bail out movement - said,
As long as Greece hasn't privatised a single cent worth of assets, increasing
the aid would be absolutely the wrong signal. At the same time governments must
help with an orderly eurozone exit.
(Schaeffler has been arguing this for a while, it should be said, in April 2010 - before the Greek bail-out was even agreed - he said that Greece should be prepared to "voluntarily leave the eurozone").

An increasing number of academics and commentators are now also suggesting that Greece should take a hike - be it temporarily or permanently. Harvard Economics Professor Martin Feldstein, for example, who this week argued,
A temporary leave of absence from the eurozone would allow Greece to
achieve a price-level decline relative to other eurozone countries, and would
make it easier to adjust the relative price level if Greek wages cannot be
limited.
In the WSJ, Editor of German weekly Die Zeit Josef Joffe wrote that,
Greece faces default no matter what it does, but only abandoning the euro
would give it a chance at growth.
And in today's FT, columnist John Plender chimes in,

If a package is agreed in June, which seems probable, the challenge will be to bring Greece to a primary budget surplus where revenue exceeds costs before interest payments. At that point, it would be sensible for Greece to bow out of the monetary union and take advantage of currency devaluation. For that to work, though, European banks would need in the interim to have bolstered their capital. And the execution risks are phenomenal. This is policymaking on a wing and a prayer.

And you know where we stand - the eurozone, in its current shape and form, is simply unsustainable (see here, here, here and here for example).

9 comments:

Idris Francis said...

If this were engineering or science - rather than the pseudo-science of economics - those involved would recognise the fundamental laws which cannot be broken, however brave a face and however dervish-like the spin.

That Greece will have to leave the euro is just as inevitable as Britain having to leave the ERM in 1992, a week or two after John Major denied any such prospect and claimed that if we left interest rates would have to go up.

We stopped putting people in debtors' prison well over 100 years ago, recognising that when any one is in such deep financial trouble that they can never recover, the only humanitarian solution is to wipe the slate clean, allow him to start again and for the creditors to lost the money they risked.

Precisely the same applies to nations - it is self-evident that neither Greece nor Ireland can ever recover compeitiveness or stabliity for as long as they are tied to euro exchange rates that suit Germany, and it was madness ever to believe they could. Worse, given the prospect of decades of poverty, anyone with any initiative or determination able to leave will do so, worsening an already impossible burden for those unable to leave.

Not that the lunatic elite who drove the euro project ever believed that it was sustainable of course - as leaks have confirmed, they knew full well that a crisis was inevitable - and intended from the beginning to use it to secure more power and control over the smaller less competitive countries as they are now doing. What caused this evil plan to blow up in their faces was that they failed to allow for the possibility of a world-wide economic crisis which would turn their planned euro crisis from maneagable to completely out of control.

And the good news? Each day that passes must surely convince "ordinary" people across the EU that what is needed is less of this demented power-grab by incompetent self-serving elitist nincompoops, not more, and so bring forward the now surely inevitable collapse not only of the euro but the entire EUSSR.

christhai said...

There are now over 100,000 people dependent on the EU's continued existence for their liveliehood. They are paid truly fabulous salaries and amazing perks. The EU commission is a template for how to rob half a billion people.

When Greece defaults, just for a start Dexia Bank in Belgium will just close its doors, probably forever. Fortis will be close behind. Credit Agricole and Bank Parisba will have their current insolvency called and will probably go under.

It is easy to talk of Greece's exit from the euro and if they are truly fortunate, the EU but there are forces at work to prevent their chance of a good future.

Now the EU will seek direct taxation to circumvent national Governments.

It is time for people to begin a true and strong resistance to bring down this evil, corrupt, wasteful, vain EU and replace it with a pan European Trading Association which it was.

Protesilaos Stavrou said...

Hello. Your remark that the eurozone is unsustainable as it currently is, is absolutely correct.
I have recently written two articles related to this issue. The first concerns all the consequences of the re-adoption of the drachma that will definitely trigger a chain effect that will have an impact on the entire European South and which can potentially tear apart the euro. The second article deals with the hot question that concerns all european policy-makers: Whether Greece can actually avoid default...
In case you are interested here as the links:
1st article (about the drachma): http://protes-stavrou.blogspot.com/2011/06/scenario-of-greece-switching-to-drachma.html
2nd article( about Greek default): http://protes-stavrou.blogspot.com/2011/06/can-greek-default-be-prevented.html

Thanks!

gosporttory said...

The sooner we get out of this EU Gravy Train fiasco the better for us all. It is getting past a joke now and with a bit of luck UKIP will gain very many more votes at the next UK general election to add to the nearly 1 million in May 2010.

Jim Hutchinson said...

I agree with all that's been said in the a/m comments . Greece and Ireland are unsustainable expenses on the EU budget . are they to be followed by Italy , Portugal and Spain in the not too distant future ? It certainly seems likely .
If Greece does come out of the EU and reintroduce the Drachma will this be the start of the domino effect ? The German population , not it's politicians , has been wanting for years to forgoe the Euro and go back to the Deutchmark . I hope they get their wish in the not too distant future and that the corrupt organization , the EU ,will be no more .

Bob Davis said...

What I find amazing is that Greece can be given money without apparent conditions as to how that is spent being applied, if the press is correct they say that Greece plans to spend £1 million on building a GP race circuit, how crazy is that. Let them leave the Euro zone and fend for themselves.
Bob

Tom Archer said...

The EU federalists have been throwing out a whole bunch of scares and mis-information to make it seem that Greece leaving the eurozone would be the end of life as we know it.

Not true.

In the first instance, Greece would break with the ECB and restore sovereignty to its own central bank (this would take place over a weekend when the markets were shut).

There would now be two currencies in place of one: euros and Greek euros. Any change of name back to the drachma would come later, and the conversion rate would probably be set at 1:1 to avoid confusion.

As part of the Act of separation, the Greek parliament would exert its sovereign right to re-denominate all euro-denominated dues of Greek citizens and institutions into the new currency, in much the same manner that they converted Drachma liabilities into euros.

The Greek central bank then creates new money (mostly electronically) to pay its dues. The new currency would be expected to de-value against the old one immediately.

Foreign banks and investors who bought into Greek bonds would be repaid fully and timely, but in the new currency; so there would be no default.

Greece would suffer a period of high inflation as the price of imported goods rose; but its tourist and export industries would be re-vitalised, creating many urgently needed new jobs.

It would not be Armageddon, few banks would lose money they have not already written off, and we could expect to see a successsion of other countries follow suit.

The euro was perhaps the biggest and most foolish vanity exercise in modern history, and the real tragedy is that in an age of electronic payment systems, there was never a case for creating it.

A web of bilateral currency locks, with scheduled review dates to relieve strains; coupled to laws forcing banks to handle and convert different currencies without commission charges; would have been much more prudent.

Open Europe blog team said...

Tom Archer - thanks for that comment. Very interesting. While sympathetic with the thrust of your remarks, are you not underestimating the potential hit that Greek banks would take in such a scenario?

William said...

Let Greece go! The EMU is too good for those Grease-balls. THe Euro will only get stronger if it is spun correctly. It will send a message to the rest of the PIGS that Germany;Finland, Sweden and the rest of the paying nations are not going to pay for very poorly run countries. Kickin the can down the road is what happens if they get more money.