Friday, April 1, 2011

Euro Exit: Now?

“Greece, Ireland and Portugal Should Restructure Their Debts Now.
They’re bust. Admit it” writes The Economist.

While Portugal’s credit rating was slashed to near-junk status on March 29th and ten-year bond yields have risen above 8%,

“the economies of both Greece and Ireland, Europe’s two “rescued” countries, are shrinking faster than expected, and bond yields, at almost 13% for Greece and over 10% for Ireland, remain stubbornly high. Investors plainly believe the rescues will not work.

They are right. These economies are on an unsustainable course, but not for lack of effort by their governments.  … At the EU’s insistence, the peripherals’ priority is to slash their budget deficits regardless of the consequences on growth. But as austerity drags down output, their enormous debts … look ever more unpayable, so bond yields stay high. The result is a downward spiral.

As if that were not enough, the European Central Bank in Frankfurt seems set on raisong interest rates on April 7th, which will strengthen the euro and further undermine the peripherals’ efforts to become more competitive.”

Conclusion: debt restructuring is ultimately inevitable. It is time for the IMF to “push Europe’s pusillanimous politicians into doing the right thing”.

I cannot agree more, but restructuring will not cure these ailing economies’ underlying problem if not accompanied by substantial exchange rate realignements in order to restore their long-term competitiveness. The prime responsibility is that of the euro’s increasingly unbalanced  “implicit intra-zone real exchange rates” and its one-size-fits-none monetary policy.

The same conclusion is reached, regarding Greece, by three German economists, Wilhelm Hankel, Wilhelm Nölling, Joachim Starbatty, and a professor of law, Karl Albrecht Schachtschneider, in a Financial Times article, “A euro exit is the only way out for Greece” (March 25th).

But one should not delude oneself: removing Greece from the euro will not “provide a way … of ensuring the survival of monetary union.” It will lead to a radical reappraisal of its viability.

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