Comment posted on the Krugman blog ... On this post, claiming that Greek exit from the euro wouldn't be too bad.
This isn't really all that convincing.
1. On shipping, since any Greek exit would necessarily involve the imposition of capital controls, and since shipping companies necessarily have legal entities and bank accounts all over the world, what is the likelihood that these hard currency revenues will be brought back home to Greece?
2. On tourism "as long as the political situation isn't too chaotic" is a bit of a big ask, and remember that a large proportion of Greece's hotel and tourism infrastructure is owned by German companies who have financed it with Euro-denominated debt (and who are therefore bankrupt on day 1 of the exit).
3. Most importantly, you can't eat shipping or tourism, and you can't heat or air-condition your house with them. The mix of Argentine vs Greek *imports* also matters. Argentina was an exporter of fuel and food. Greece is a net importer of both, and would end up having to impose fuel rationing. As a way of avoiding "austerity", Euro exit seems to involve a hell of a lot of austerity.What I don't understand at this point in the crisis is why "default and remain in the euro" isn't being given more consideration since it is actually the economic policy of SYRIZA. I have a horrible feeling we're sleepwalking into an outcome that will be awful for the Greek people, for no better reason than Keynes' "relentless urge to action rather than inaction". Actually, the current situation could be sustained as an equillibrium for a very long time, if policymakers wanted to. That damned stupid "kicking the can down the road" metaphor has a lot to answer for, particularly as no bugger ever explained precisely why you can't carry on kicking a can down a road indefinitely. Strikes me as the sort of thing you could do all day and why I was six I probably did.
Update: Also see this excellent comment on Larry Elliott's attempt to push the same idea. If Argentineans had an unconditional right to emigrate and work in the USA, the recovery would surely have taken a very different path.
Yes but the unconditional right of Greeks to live and work elsewhere in the UK could disappear in an instant too. Euro exit probably implies simultaneous EU exit (or suspension, at least).
ReplyDeleteGod I hadn't even thought of that; I suppose that they would, in principle, be in breach of the Maastricht and Lisbon treaties by leaving the Euro, even if they were effectively chucked out. I suspect that some legal manouvre would be found to keep them in the EU, but if not, that of course makes Euro exit an even worse idea.
ReplyDeleteAh, ballymichael is a great bunch of lads. Irish expat in Germany, IIRC from other places on the Internet.
ReplyDeleteThe Greek shipping industry point is a good one. Not that I have any as clients but this paper appears to summarise the basic structure:
http://202.114.89.60/resource/pdf/2357.pdf
"Greek-owned shipping companies are defined as the companies that manage ships controlled by Greek shipowners. Traditionally, the ships are owned by shipowning companies established in some country that provides corporate and tax freedom. Each ship belongs to a separate shipowning company, which assigns the management of the ship to a management company also established in turn in a country providing institutional and tax freedom. The shipowning company acts as the principal and the management company as the agent. In most of the cases however, both companies are related to the same person(s) or family. The management company establishes an agent in Piraeus, London or/ and in another maritime centre, which undertakes the operation of ships."
So, if I'm reading this right, you have a management agent company in Greece, and all the valuable stuff is held in tax haven SPVs - if they've not been set up in such a way that none of the profits they generate need ever be repatriated to Greece, but instead sit in an offshore discretionary trust or company to be drawn down on at need, I would be very surprised indeed.
On the other hand, being able to buy fuel in high-value Euros is no use if you don't have any Euros and nobody will extend you credit. This seems to be happening with the money-supply problems in Greece already; reports of refiners unable to operate due to not being able to buy crude on account in the normal commercial manner.
ReplyDeleteI think at this point making use of the Schengen rights is the only way forward. If one of the Greek parties started advocating mass economic migration into Germany it would press the issue.
Greece remaining in the Euro _requires_ either massive deflation or massive tranfers, right?
Chris Bertram: 'Euro exit probably implies simultaneous EU exit (or suspension, at least).'
ReplyDeleteHmm, I don't buy this at all. As I understand it there isn't a formal mechanism for expelling nations from the EU, just as there isn't a formal mechanism for leaving the Euro.(The person to ask about the details of the EU treaties would probably be Henry Farrell.)
In any case, if the Eurozone nations really did decide they wanted to kick Greece out of the EU as well, then making that happen would surely require the consent of all EU member nations, not just Eurozone member nations. There are several countries which would be highly unlikely to agree to a Greek exit, including one collection of islands, forget the name, which is the second or third biggest EU economy but which isn't a Eurozone member....
Also I rather doubt that the French and the Germans would want to kick the Greeks out of the EU even if Greece did leave the Eurozone, since the economic hit to Greece is going to be even larger if their exports are subject to EU tariffs and their workforce no longer has Schengen rights.
The German and French banks are going to take big hits in the event of a Greek exit anyway. Kicking the Greeks out of the EU might make this hit bigger and might also necessitate massive emergency transfers from the EU to Greece if a major slump translates into a humanitarian crisis, as it probably would.
Dsquared: 'What I don't understand at this point in the crisis is why "default and remain in the euro" isn't being given more consideration since it is actually the economic policy of SYRIZA.'
ReplyDeletePerhaps because if Greece is allowed to do that, then people begin to ask why Ireland, Portugal, Spain and perhaps Italy can't do the same?
There isn't a formal mechanism for leaving the €, but there is a clause in the Lisbon Treaty which makes it possible to resign from the EU. (Also, as a Eurotrainspotter, I'd point out that Greenland has joined the EU, left the EU, and rejoined the EU under amended terms, all when this wasn't officially possible, although whether it counts depends on who you ask.)
ReplyDeleteI suppose there's another solution; stay in the € but quit the EU, as there are places in the Balkans that use euros without being in the EU. I'm not sure what the point would be, but perhaps if you're a eurosceptic who also likes a gold standard it might be your thing, and those might be more common than you think.
I don't buy this at all
ReplyDeleteI have been, as you'd expect, shaking the trees quite a lot on this point and some people who know what they're talking about agree with you and some with Chris. If Greece left the Euro, it would already be in breach of the Maastricht treaty (for using a currency other than the Euro), and it would almost certainly need to impose capital controls (treaty of Rome). So it would be in pretty dire straits in terms of expecting other Member States to honour its rights under Schengen and Lisbon in terms of free movement. I think you're right that nobody in the remaining EU would want to make a bad situation worse, but credible people have suggested that Greece itself might end up needing to go the Full Albania and restrict emigration of its workforce, particularly if they were carrying bags of hard currency. It would all be a bit chaotic and I am increasingly getting the sense that not very much careful planning has been done at the highest levels.
In general it is hard to do much forecasting work when the basic principles of rationality like "Don't do amazingly obviously stupid things, and if something is amazingly obviously the right thing to do, do that instead" aren't being respected.
Perhaps because if Greece is allowed to do that, then people begin to ask why Ireland, Portugal, Spain and perhaps Italy can't do the same?
AFAICS, the answers are "Portugal almost certainly will, Spain might or might not, Ireland won't because it wants to preserve its FDI and Italy can probably struggle on until the debt gets mutualised into Eurobonds anyway".
On Googling,this paper (pdf) confirms that there's no current formal mechanism to expel a nation from the EU, but that one could probably be improvised in a time of emergency, so long as there was unanimity among the other EU nations. Which brings me back to my points that a) non-Eurozone EU members (like the UK) are very unlikely to agree to expelling Greece for its sins with regard to the Euro, and b) even Eurozone members are unlikely to want to expel Greece from the EU as this would simply compound the problems they already faced from a Greek default.
ReplyDeleteI can't help feeling that if the current leaders of the EU and the US complained about their huge problems to Harry Truman, George Marshall, Dean Acheson, Clem Attlee and Ernest Bevin, the result would be scornful laughter. I rather suspect that they would suggest that the Greeks withdraw from the Euro in return for a subsidy lasting, say, three years and equivalent to 70% or 80% of Greece's current annual fuel and food import bill. The key provision of the Marshall Plan was hard currency so that Western European economies didn't run short of key purchases like food and fuel, and I don't actually see any good reason why that can't happen again.
In practice, it's very likely that the current nutcase Congress would block any major US contribution to such a plan, and so would the parliaments of some of the smaller EU economies, plus Italy. But again, the Germans, French, British and a few of the more responsible smaller EU nations, like the Dutch, could manage such a subsidy.
The consequences would be slightly painful for the subsidising nations and very painful for the Greeks, but this might be the least worst option on the table. Prediction: I think something like this will happen, though probably later, after much avoidable pain, rather than sooner.
Dsquared: 'In general it is hard to do much forecasting work when the basic principles of rationality like "Don't do amazingly obviously stupid things, and if something is amazingly obviously the right thing to do, do that instead" aren't being respected.'
ReplyDeleteGenuine question: what, right now, are the amazingly obvious right things to do that aren't being done? And why, in your opinion, aren't they being done?
Basically a bunch of technical measures by the ECB, plus cramdown on bondholders of the Spanish banks, in the short term. In the longer term, renegotiation of the Lisbon Treaty to get rid of the pathological aspects of the ECB constitution. Why? I really don't know. I think a lot of it is just chicken-gaming between bureaucracies who think that if they leave the washing up in the sink long enough, someone else will lose patience and do it.
ReplyDeleteI rather suspect that they would suggest that the Greeks withdraw from the Euro in return for a subsidy lasting, say, three years and equivalent to 70% or 80% of Greece's current annual fuel and food import bill.
ReplyDeletebut it's just so much cheaper to organise something like this in the context of remaining in the Euro ... the other problem is that unlike with the Marshall Plan, the government that you're dealing with is Greece and you don't have the leverage that the US did in the postwar period to make sure that the subsidy actually gets used for what it's meant to be used for.
Hmm, but if both of those amazingly obvious right things to do were now being done with great vigour, we'd still have a Greek crisis, wouldn't we? Do we agree that the Greek crisis is essentially about the existing weaknesses of the Greek economy, Greece's membership of the EU, and the refusal of the Greek electorate to give enough votes to parties supporting the EU/IMF austerity package?
ReplyDeleteIf we do, then none of those factors would be greatly affected by a more sensible approach to Spanish bondholders now or a revision of the Lisbon Treaty in several months or years time.
Aarrgh- for 'Greece's membership of the EU' above, substitute 'Greece's membership of the Euro'.
ReplyDelete'the other problem is that unlike with the Marshall Plan, the government that you're dealing with is Greece and you don't have the leverage that the US did in the postwar period to make sure that the subsidy actually gets used for what it's meant to be used for.'
ReplyDeleteThe Greeks actually got a lot of Marshall Plan subsidy, and their government of the time was at least as corrupt and chaotic, though somewhat more dictatorial, than it is now. But that's a quibble.
More seriously, how is it cheaper to run a hard currency transfer if Greece stays inside the Euro than if it leaves?
Do we agree that the Greek crisis is essentially about the existing weaknesses of the Greek economy, Greece's membership of the [euro], and the refusal of the Greek electorate to give enough votes to parties supporting the EU/IMF austerity package?
ReplyDeleteThat's the Greek problem. It turns into the Greek crisis because the ECB, Commission and Eurogroup all decide to ignore these political realities and go on trying to act normally in abnormal conditions.
how is it cheaper to run a hard currency transfer if Greece stays inside the Euro than if it leaves?
partly because you don't have to deal with the storm and stress of it leaving (and the contagion to Spain, Italy, Ireland, etc) and partly because while it's in the Euro, you don't have to worry that the hard currency you're pumping in is just facilitating capital flight (because you're adopting a policy which finances the capital flight anyway).
'That's the Greek problem. It turns into the Greek crisis because the ECB, Commission and Eurogroup all decide to ignore these political realities and go on trying to act normally in abnormal conditions.'
ReplyDeleteBut, as far as I can see, none of your obviously-right-things-to-do-that-aren't-being-done-now do anything to ameliorate either the Greek problem or the Greek crisis.
Unless some of the 'technical ECB measures' do, so it would be interesting to hear about them in more detail.
But right now, though I might very well be wrong, I can't quite imagine what technical ECB measures would alter the fact that if Greece wants to stay in the Eurozone, it is dependent on an austerity package which the Greek electorate has just rejected.
You're advocating 'default and stay in the Euro' as a sensible policy (or a less insane policy than most of the others on offer). You're against 'default, leave the Euro, stay in the EU and arrange a hard currency transfer to pay for fuel and food imports'.
ReplyDeleteYou oppose the second policy in part because that means the EU would have to deal with 'the storm and stress of (Greece) leaving (and the contagion to Spain, Italy, Ireland, etc)'.
But surely if Greece stays in the Euro and defaults, as you appear to advocate, then at the very least the markets start to price in the possibility that Spain, Italy, Ireland etc will do the same. At the most, some or all of those other countries will actually stay in the Euro and default.
So could we end up facing a choice between: a) 'Greece stays in the Euro and defaults, possibly leading to Ireland, Portugal, Spain or Italy (the latter being the fourth biggest EU economy) doing the same' and b) 'Greece leaves the EU and gets a subsidy to pay for fuel and food, possibly leading to Ireland, Portugal, Spain or Italy doing the same'?
If we do end up facing such a choice- at which point does a) become more expensive or dangerous than b)?
At no point, because "leaves the Euro" means "leaves the Euro and defaults" - leaving the Euro always gives you all the costs of default plus the cost of Euro breakup; it's strictly a worse outcome.
ReplyDeleteIn terms of the technical measures, I've been telling people all morning to not get hung up on specific policies because the important thing is the clear communication of will. The ECB actually is Superman in the Euro zone, so it can use the Superman Conditional tense ("our policy is to stop bank runs/to ensure rollover of Greek debt etc"). All of the possible ways in which the ECB should act fall under the general heading of "printing money", but it could, for instance, buy all the Greek Government Bonds currently held by the Greek banking system (about EUR20bn), buy all the Spanish bonds in the Spanish system (about EUR100bn), give a banking licence to the ESM and allow it to borrow at the deposit window (potentially EUR1trn in firepower). If there was a newspaper competition to come up with ways the ECB could halt the crisis I could probably do 20 in a morning. But it has to be able to convince everyone that it is ready to act and ready to do "AS MUCH AS IT TAKES" (this phrase is the ECB equivalent of "by the power of Grayskull").
Doing things like putting out an absurdly misleading press release saying that the Greek banking system were cut off from ECB lending as of today (not true; they were cut off from one facility and moved to another), and then seemingly taking their phone off the hook for the Ascension Day holiday do not contribute to the air of calm competence.
Okay. First question: if the markets decide that 'the probability of Italy remaining in the Euro and defaulting, if Greece has already done the same' is greater than 'the probability of Italy leaving the Euro and defaulting, if Greece has already done the same', then doesn't Greece remaining in the Euro become the more dangerous policy?
ReplyDeleteSecond question: Are there possible circumstances in which the markets might think this?
Third question: Am I right in thinking that the most dangerous outcome to this crisis is one in which the fourth-biggest EU economy defaults? And that the second most dangerous outcome is one in which the markets *think* that Italy will default, and the ECB has to spend squillions to prevent this happening?
I don't think it does in 1), because "leaving the Euro and defaulting" is sooooo much more expensive and nastier than "staying in the Euro and defaulting". So you would almost rather have Italy defaulting in the Euro than Greece leaving the Euro[1].
ReplyDelete[1] I am using "defaulting" in the rating agency sense here as including a negotiated writedown of principal, rather than necessarily being a chaotic affair. In that sense we know that Greece can default and remain in the Euro because it's already done it.