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Thursday, July 16, 2015

The Greek Fix

At the time of writing, the Greek Crisis of (Summer) 2015 appears to be winding down. The economic crisis should calm down, although the political situation appears to be heavily damaged. The crisis will only flare up once slowing global demand pushes the larger euro area economies back into recession. Brief comments follow.

  • Most of the analysis about Greece is now political, trying to assign blame to parties. Alternatively, people will argue whether Grexit was the best option. (For the record, I feel that Grexit was the optimal solution, and it would probably raised the odds of the long-term survival of the euro.) I have my obvious biases, but I do not expect to change anyone else's views on the matter.
  • Although I am sympathetic to the view that the Greek situation will unravel within "two to three years" (as most commentators phrase it), I would not phrase my sentiment in terms of a calendar schedule. If the euro area is growing (but presumably slowly), the political will to find a settlement will always be there. Presumably no government will follow the incompetent steps of Tsipras, who antagonised the EU without having any form of leverage (willingness to exit). (Remember my previous point?) However, a deep downturn will blow up pretty well everyone's fiscal plans, and the EU will have become flexible on fiscal policy (which they were from 2008-2010) -- or else the economic pressure will be incredible. Although global demand is not particularly buoyant right now, I am uncertain whether a global recession is imminent.
  • On the political side, I am in agreement with this article by Ambrose Evans-Pritchard. The EU project was long opposed to be the right of the spectrum, but the latest moves have now alienated the left. European policymakers appear extremely intent on replicating as closely as possible the steps of their forefathers during the 1930s. The centre clings to a fixed exchange rate regime which destroys their economies, leaving the centre to be hollowed out from both sides. Also, he argues what I previously wrote -- debtor leaders have learned that there is no point in attempting to negotiate with the EU. You need to pre-emptively threaten to leave. Although this will cause moderate politicians from repeating Tsipras' steps, it also means that when the euro rupture happens, it will be traumatic.

(c) Brian Romanchuk 2015


  1. What is the likely near-term result if Greece closed it's central bank? In it's place, Greece would allow other euro banks to setup shop in Greece.

    I have not thought this through. My initial reaction: Greece would become something like an American state so far as banking services were concerned. (A contra-example would be Montana which for may years prohibited any but wholly Montana owned banks from operating in the state. This rule has been repealed.)

    1. Creating a new central bank and currency is easy. The problem is the existing banking system, as well as the private sector (and government bonds) are still denominated in euro. That legacy system is still in trouble, until the government passes legislation to deal with those problems. This is why I view the best option is to keep Greek euros, but break the link with the rest of the euro area.


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