Op-Ed Contributor Why Greece Should Reject the Euro By MARK WEISBROT Published: May 9, 2011
SOMETIMES there is turmoil in the markets because a government threatens to do what is best for its citizens. This seemed to be the case in Europe last week, when the German magazine Der Spiegel reported that the Greek government was threatening to stop using the euro. The euro suffered its worst two-day plunge since December 2008.
Greek and European Union officials denied the report, but a threat by Greece to jettison the euro is long overdue, and it should be prepared to carry it out. As much as the move might cost Greece in the short term, it is very unlikely that such costs would be greater than the many years of recession, stagnation and high unemployment that the European authorities are offering.
The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. Its peso was pegged to the dollar, which is similar to Greece having the euro as its national currency. The Argentines took loans from the International Monetary Fund, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened.
Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty.
Within three years Argentina was back to its pre-recession level of output, despite losing more than twice as much of its gross domestic product as Greece has lost in its current recession. By contrast, in Greece, even if things go well, the I.M.F. projects that the economy will take eight years to reach its pre-crisis G.D.P. But this is likely optimistic — the I.M.F. has repeatedly lowered its near-term growth projections for Greece since the crisis began.
The main reason for Argentina’s rapid recovery was that it was finally freed from adhering to fiscal and monetary policies that stifled growth. The same would be true for Greece if it were to drop the euro. Greece would also get a boost from the devaluation’s effect on the trade balance (as Argentina did for the first six months of recovery), since its exports would be more competitive, and imports would be more expensive.
Press reports have also warned of a sharp increase in Greek debt from devaluation if it were to leave the euro zone. But the fact is that Greece would not pay this debt, as Argentina did not pay two-thirds of its foreign debt after its devaluation and default.
Portugal just concluded an agreement with the I.M.F. that projects two more years of recession. No government should accept this kind of punishment. A responsible leader would point out to the European authorities that they have the money to support Greece with countercyclical policies (like fiscal stimulus), though they are choosing not to.
From a creditors’ point of view, which the European Union authorities have apparently adopted, a country that has accumulated too much debt must be punished, so as not to encourage “bad behavior.” But punishing an entire country for the past mistakes of some of its leaders, while morally satisfying to some, is hardly the basis for sound policy.
There is also the idea that Greece — as well as Ireland, Spain and Portugal — can recover by means of an “internal devaluation.” This means increasing unemployment so much that wages fall enough to make the country more internationally competitive. The social costs of such a move, however, are extremely high and it rarely if ever works. Unemployment has doubled in Greece (to 14.7 percent), more than doubled in Spain (to 20.7 percent) and more than tripled in Ireland (to 14.7 percent). But recovery is still elusive.
You can be sure that the European authorities would offer Greece a better deal under a credible threat of leaving the euro zone. In fact, there are indications that they may have already moved in response to last week’s threat.
But the bottom line is that Greece cannot afford to settle for any deal that does not allow it to grow and make its way out of the recession. Loans that require what economists call “pro-cyclical” policies — cutting spending and raising taxes in the face of recession — should be off the table. The attempt to shrink Greece’s way out has failed. If that’s all that the European authorities have to offer, then it is time for Greece, and perhaps others, to say goodbye to the euro.
What? I don't think I understand any of that.
Basically I understand this guy as saying..... just default on your debts and everything will get better. Its every other country in the regions job to make sure that the country is fiscally ok, whether or not the politicians they elected put them in this predicament with stupid policy.
For that matter the guy seems to believe that countries will care if Greece says.... oh we want out.... we don't want to be on the Euro.... ok. Because that worked so well in the first place right?????
The reason for the Euro and unification was what?????
Nowotny Signals ECB May Bend on Greece By Jana Randow and Simone Meier - Jul 19, 2011
European Central Bank council member Ewald Nowotny suggested the bank may compromise and allow a temporary Greek default as officials scramble to fix a sovereign debt crisis that’s spreading to Italy and Spain before a leaders’ summit in two days.
As Spanish financing costs surged at a 4.45 billion euro ($6.31 billion) treasury bill auction today, policy makers are trying to ease a split that’s pushed interest rates on Spanish and Italian 10-year debt above 6 percent for the first time since the euro debuted 12 years ago. The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country.
“Nowotny is well known as someone who talks a lot,” said Nick Kounis, head of macroeconomic research at ABN Amro Bank NV in Amsterdam. “He might be revealing that there’s a little bit more flexibility than what was perhaps assumed. On the other hand, we have to be a bit careful with Nowotny. I’d be cautious.”
Nowotny, who heads Austria’s central bank, issued a statement today concerning the “interpretation” of his earlier comments in an interview with CNBC. He is in “complete agreement” with ECB President Jean-Claude Trichet that the aim is to “avoid any situation that would make it impossible for the ECB to continue to accept Greek sovereign bonds as collateral,” the statement said.
‘Range of Options’
In the CNBC interview broadcast this morning, Nowotny said there’s “a full range of options and definitions, from a clear- cut default, selective default, credit event and so on.”
“This has to be studied in a very serious way,” he said. “There are some proposals that deal with a very short-lived selective default situation that will not have major negative consequences.”
The comments helped boost financial markets amid speculation a solution to the crisis will be found. The euro rose to $1.4197 at 12:20 p.m. in Frankfurt, up from $1.4028 yesterday. Yields on Spanish and Italian 10-year bonds retreated from euro-era highs as stock markets rallied.
Spanish yields fell 17 basis points to 6.10 percent as of 12:35 P.m. in London, while Italy’s yield dropped 23 basis points to 5.72 percent. Greek two-year yields surged to 38.5 percent.
Eurobond Fix
Some finance ministers have started to zero in on Eurobonds as part of the fix for a crisis that has ricocheted through the euro region for more than 18 months and is now threatening to engulf two of its biggest members. While jointly issuing bonds with Germany may help debt-laden nations tap markets at lower interest rates, it could also raise borrowing costs for Europe’s largest economy.
European Union leaders are meeting on July 21 to hammer out a solution to the Greek debt crisis, which has already spread to Ireland and Portugal. While Germany wants private investors to participate in a second bailout package for Greece, Trichet says the central bank won’t accept Greek government bonds as collateral for loans in the event of a default or “credit event.”
By contrast, Nowotny said it’s up to the Frankfurt-based central bank to decide what collateral it accepts and it “should not be totally dependent on rating agencies.”
‘Our Decision’
“It is our own responsibility, our own decision,” he told CNBC. “We have proved this in the case of Ireland, Greece and Portugal, with regard to what kind of collateral we accept. So there is a certain case for independence. But of course, not with regard to rating agencies but with regard to our own statutes, there are limitations.” He reiterated that view in his subsequent statement.
EU President Herman van Rompuy has asked leaders to meet in Brussels to discuss “the financial stability of the euro area as a whole and the future financing of the Greek program.” Yesterday, stocks declined around the world, the euro fell and the cost of insuring European sovereign debt rose to records amid concern the euro region isn’t any closer to solving the crisis a year after Greece’s initial rescue.
A summit was originally mulled for last week before being postponed amid German fears it would backfire without a pact on private-sector involvement. Germany’s government says no extra aid is possible without bondholders staying exposed to Greek debt.
‘Continue to Fight’
“I don’t expect European leaders to reach a decision this week,” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt. “They’ll continue to fight over whether to include bondholders or not. Still, a Greek debt restructuring wouldn’t be a solution to the problem.”
The euro-region recovery is losing momentum as leaders struggle to contain the crisis. In Germany, Europe’s largest economy, investor confidence dropped to the lowest in 2 1/2 years in July, the ZEW Center for European Economic Research in Mannheim said today. European economic confidence dropped in June and manufacturing growth slowed.
Nowotny said a full Greek default must be avoided. “That would have very grave consequences, especially with regard to the ECB and the ability of the ECB to accept Greek collateral,” he told CNBC.
_________________ Last visit was: Wed Dec 31, 1969 7:00 pm It is currently Wed Oct 22, 2008 6:43 am When the Power of Love overcomes the Love of Power, the World will know Peace. - Jimi Hendrix
they already got the money i thought wha they want more now? mayber they should turn the parthenon into a bed and breakfast
_________________ Last visit was: Wed Dec 31, 1969 7:00 pm It is currently Wed Oct 22, 2008 6:43 am When the Power of Love overcomes the Love of Power, the World will know Peace. - Jimi Hendrix
[An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany] is not only unlikely to succeed but would also run into some serious structural difficulties. To cover 100% of the roll-over for Greece, Portugal, Ireland, Spain, Italy and Belgium as well as an allowance for bank support at 7% of the banks' balance sheets until the end of 2013, the support mechanism(s), would need to be able to deploy a total of €2.4trn in available funds. Assuming the Greek Loan facility and the EFSM remain in place, the EFSF would have to increase its deployable funds from currently about ~€270bn to €1,450bn...
...The question is how big the private sector participation could be. Taking the "French proposal" as a guide, the private sector participation would reduce the size of the EFSF by €137bn or 9% of the €1.45bn EFSF funding, assuming 70% of the debt is rolled over, 30% collateralization and 75% of banks participate. The problem with this private sector participation so far has been the risk that this may be regarded as a default by the rating agencies. As a consequence the banks would have to write down these exposures to market prices. This exercise would lead to reported write-downs for the European banking sector of €75bn, 0.55 times more than the liquidity support that the EU is seeking. And in particular in Portugal and Greece the fallout of the MTM losses far outstrips the increase in liquidity. Even more importantly, more than half of these losses would occur in the banks of the periphery countries themselves. In the absence of an open market for these banks, the losses would have to be made up by the governments themselves and subsequently added back to the EFSF utilization.
The Ticking Euro Bomb How a Good Idea Became a Tragedy
The Greek crisis has revealed why the euro is the world's most dangerous currency. The euro was built on a foundation of debt and trickery, where economic principles were sacrificed to romantic political visions. The history of the common currency is the story of a good idea that turned into a tragedy of epic proportions.
Condensed recount of the tale of the euro from birth to the current crisis. It starts here:
(Reuters) - Euro zone countries will ask banks to accept losses of up to 50 percent on their holdings of Greek debt, officials said on Wednesday, as part of a grand plan to avert a disorderly default and try to end a crisis that threatens the world economy.
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