Stephanie Flanders directs us to to this picture from HSBC which nicely summarizes the problems the Euro has created for Greece over the past decade:
It is striking how the Eurozone periphery has lost so much competitiveness as indicated by the real exchange rate appreciation. Stephanie Flanders also makes the point that even if the European bail-out of Greece takes place it only buys time and does not address the real problems: Greece's debt overhang and its inability to restore fiscal order. Flanders recommends a more radical but meaningful solution of (1) restructuring Greece debts and (2) setting a higher inflation target for the ECB. She acknowledges these are "unthinkable" options, but when the alternative could be a Lehman II why not consider the "unthinkable"?
It is striking how the Eurozone periphery has lost so much competitiveness as indicated by the real exchange rate appreciation. Stephanie Flanders also makes the point that even if the European bail-out of Greece takes place it only buys time and does not address the real problems: Greece's debt overhang and its inability to restore fiscal order. Flanders recommends a more radical but meaningful solution of (1) restructuring Greece debts and (2) setting a higher inflation target for the ECB. She acknowledges these are "unthinkable" options, but when the alternative could be a Lehman II why not consider the "unthinkable"?
More grist for the Eichengreen-Temin thesis that the Great Depression was exacerbated by the Gold Standard (for Gold Standard, read EMU)
ReplyDeleteOne interesting thesis in the Financial Times is that all the hoopla over Greece and the euro is a smokescreen to divert our attention from the real story. European banks hold significant quantities of Greek bonds and are therefore militating for a bailout. In other words, this is all about taxpayers - whether German or otherwise - being once again asked to bail out feckless bankers who were quite happy to advance loans without doing due diligence. This is nothing to do with the viability of the euro, but it suits European banks if its framed that way to divert attention from yet another bank robbery from the long-suffering workers
ReplyDelete