Calomiris: Greece Should Leave the Euro

Have a look at Bloomberg’s TV interview of Columbia University finance professor here.

Makes sense. Economists that do not depend for their career on European political authorities tend to agree ...

Kenneth Rogoff on the Surprising Strength of the Euro

“Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months?

The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems.”

Read more of the Project Syndicate post here. 

Greek Democracy

 Competitive politics, i.e. democracy, should bring out in the open available information. Here is a valuable contribution by Ambrose Evans-Pritchard (“Revenge of the Sovereign Nation” in The Telegraph),  here

about the Europeans' so-called "rescue plans" supposedly meant to "save" Greece, but in reality pushing the Greek economy over the brink in order to try to save the euro.

Excerpts:

… “the Greeks are stripping away the self-serving claims of the creditor states that their “rescue” loan packages are to “save Greece”.

They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state, without any offsetting monetary stimulus or devaluation.

The economy has so far collapsed by 14pc to 16pc since the peak – depending who you ask – and is spiralling downwards at a vertiginous pace.

The debt has exploded under the EU-IMF Troika programme. It is heading for 180pc of GDP by next year. Even under the haircut deal, Greek debt will be 120pc of GDP in 2020 after nine years of depression. That is not cure, it is a punitive sentence.

Every major claim by the inspectors at the outset of the Memorandum has turned out to be untrue. The facts are so far from the truth that it is hard to believe they ever thought it could work. The Greeks were made to suffer IMF austerity without the usual IMF cure. This was done for one purpose only, to buy time for banks and other Club Med states to beef up their defences.

It was not an unreasonable strategy (though a BIG LIE), and might not have failed entirely if the global economy recovered briskly this year and if the ECB had behaved with an ounce of common sense. Instead the ECB choose to tighten.

When the history books are written, I think scholarship will be very harsh on the handful of men running EMU monetary policy over the last three to four years. They are not as bad as the Chicago Fed of 1930 to 1932, but not much better.

So no, like the Spartans, Thebans, and Thespians at the Pass of Thermopylae, the Greeks were sacrificed to buy time for the alliance.

The referendum is a healthy reminder that Europe is a collection of sovereign democracies, tied by treaty law for certain arrangements. It is a union only in name.”

Excellent summary.

The Economics of Internal Devaluation

Today’s post by Henry Kaspar for Kantoos Economics,  here, is well worth reading.

Excerpt:

“Internal devaluation is tough. Assume Portugal is overvalued by 20 percent, and suppose it maintains its current speed of adjustment, i.e. – 0.9 percent per year. If unit labor costs for the average of the euro area continues to grow by just 0.8 percent annually, it will take 14 years until Portugal has restored a competitive position. Neither investors nor the Portuguese and wider European public will grant the process that much time.”

The punch line:

“there are few (if any) examples in history of heterogeneous countries that were able to tie their currencies together for long periods.”

Austerity + Fixed Exchange Rate = Policy Failure

Read The Wilder View (Rebecca Wilder), here.

Mankiw on Four Typical Mistakes to Avoid

Those of Zimbabwe, Japan, Greece and France. Here.

Krugman on the euro and rescue plans

His recent post “The Hole in Europe’s Bucket” (Commentary, NYTimes) says it all.

Excerpts:

“Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from … Italy, the euro area’s third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely …

To save the euro, this threat must be contained. But … here’s the problem: All various proposals  … ultimately required backing from major European governments, whose promises to investors must be credible for the plan to work. Yet Italy is one of those major governments; it can’t achieve a rescue by lending money to itself. And France, the euro area’s second-biggest economy, has been looking shaky lately …”

“What makes the story really painful is the fact that none of this had to happen … Britain, Japan and the United States … have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret?  The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically …

But such action, we keep being told, is off the table. The statutes … supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen. The broader problem, however, is that the whole euro system was designed to fight the last economic war. It’s a Maginot Line built to prevent a replay of the 1970s, which is worse than useless when the real danger is a replay of the 1930s. …

The … European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and – like the gold standard in the 1930s – has turned into a deadly trap.

Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.

The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system  has been performing, Europe might be better off if it collapses sooner rather than later.”

No further comment is necessary.