Wednesday, May 23, 2012

Grexit or not?

(Update: The Tim Duy post I linked to below has now been superseded by this report from him on the outcome of the meeting of Eurozone officials yesterday. He's still not happy!)

Over the last few months I have been following the continuing chaos in the Eurozone, much like everybody else in Europe who has a TV, radio or internet connection, I suppose. The spectre of a Greek exit from the Euro seems to have been dominating the front pages a lot more just recently, but most (or certainly most American) economists have been predicting this since about late 2010.

Anyway, this is a subject way outside my personal expertise, so I'm not going to make any comment of my own other than to say I find it darkly amusing that irresponsible borrowing is generally regarded as a far greater moral sin than irresponsible lending. What I will do is to provide some snippets of more expert opinions and share some links where you can read stuff to help you make sense of what's likely to happen in the next couple of months.

In the New York Times, Paul Krugman is very pessimistic:
So now what? Right now, Greece is experiencing [...] a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again. 
This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up. 
Yet financing isn’t enough. Italy and, in particular, Spain must be offered hope — [...] some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to [...] accept and indeed encourage several years of 3 percent or 4 percent inflation [...] 
Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved.
He's actually been making very similar points for a long time, though I can't dig up all the links.

Via Mark Thoma (of Economist's View), I see Tim Duy has a similar view, and the same sense of who is to blame:
Cutting Off Your Nose: ... to spite your face. This should be the new, official slogan of German policymakers. It is pretty clear that financial conditions in Europe are unravelling, now putting the Euro into free-fall [...]
Merkel sees a large stick as the only way to end the crisis. She is unwilling to recognize that she needs to match that stick with a large carrot. At the end of the day, rather than concede on the necessity of internal fiscal transfers to make this work, she would rather doom the entire project to failure [...] 
On the other hand, Simon Wren-Lewis sees some glimmer of hope:
Why I can still believe the Euro will survive, just: Paul Krugman thinks that Greece will probably leave the Eurozone. It is generally foolish to disagree with PK, and what follows is a huge hostage to fortune, but here goes. It is clear that Greece wants to stay in the Euro. Their people do and so do most political parties, including Syriza. [...] This is the first reason why I think the Euro may survive [...]
The main plank of my flimsy optimism about the Euro is that the decision to abandon Greece is a Eurozone decision, rather than the decision of sections of German public opinion or particular European officials.
Most of the pieces above are filled with their own links which might take some time to read, so I think I'll stop there.

No comments:

Post a Comment