Arnold Kling  

Sentences to Ponder on the Eurozone

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1. From Tyler Cowen.


It probably is about time to judge the euro zone as a failed idea -- and rarely is it wise to double down on failed ideas.

2. From David Zervos via John Mauldin's newsletter (you may need a free subscription):


A bank run is the only way to get to equilibrium in this system.

John Cochrane says it makes no sense for Greece to stop using euros. Well, as long as somebody is willing to lend them euros, yes. But if no one is willing to lend them euros, and they have big budget deficits, and they are not allowed to print euros, then they have to start producing their own currency. The result of that, given their deficits, will be hyperinflation in their domestic currency. Eventually, that would produce a government that will balance its budget. And probably go back on the euro.

Anyway, both Tyler's article and John Mauldin's newsletter issue entitled "Meanwhile, Back at the Ranch" are worth reading in their entirety.


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CATEGORIES: Eurozone crisis



COMMENTS (7 to date)
D. F. Linton writes:

You say "not allowed to print Euros", but that is actually not the end of it. The Bank of Greece prints Euro banknotes. Now they are only supposed to print with the authorization of the ECB, but what if they print just anyway? Why change to a new currency when you can counterfeit all you want of a major world currency?

Joe Cushing writes:

Hyperinflation for Greece is just a way to default on debt to it's own people, to reduce wages to it's government employees, and reduce government spending. They could do all of these without hyperinflation but for some reason this is considered worse.

c141nav writes:

Maybe they should just print euros

Ari Tai writes:

What happens when Germany does the unexpected, but totally within their power without negotiation? i.e. What if Germany brings back the DM as its preferred currency - likely without abandoning the Euro - and lets it float? I suspect it's a win-win. Everyone else that has a less productive economy takes a big quality of life hit (making everyone more equal which the socialists believe wins them votes) - but they can now meet their entitlement and pension obligations with a much cheaper Euro, and Germany takes a small hit as it has to compete even harder (applying even more automation with its above average skill STEM-educated work-force – esp. relative to the U.S.) to move most of the last third of its exports outside of Europe. And the hit is a fraction of the costs of the current path - and German's are known for being able to tighten their belts and do the unpleasant to get to a better place.

Sweden wins too. Rather than forcing austerity on the private sector, it shrunk government and encouraged those government employees to move from being burden (below the line costs) to the private sector where at least some fraction created new wealth (and new government revenues). The U.S. government tells us that public employees are compensated well above average because they are, well, well above average (shades of Lake Wobegon). Imagine how the U.S. economy would boom if these very able people found themselves creating companies and employing people rather than say, delivering mail for the USPS - or (per Jerry Pournelle) writing and enforcing regulations for owners of rabbits and puppies.

Shayne Cook writes:

From John Cochrane's article: "Greece has every right to say "the euro is legal tender in Greece," no matter what the rest of Europe does."

I would add that Greece has every right to say any currency is legal tender in Greece, including a reintroduced Drachma - in addition to the Euro. Increasingly I'm beginning to suspect Greece (with the endorsement of the EU and ECB) will adopt a hybrid system that includes both the Euro and the Drachma as legal tender.

The Drachma will be used (recognized) internally for local and government payments/transactions/debt, while still using the Euro for foreign exchange and debt (and internal payments, on a voluntary basis). Drachma manipulation and exchange rate against the Euro can be managed by the Greek Central Bank in cooperation with the ECB.

The EU politicians "win" by not completely losing Greece from the EU. The Greek politicians "win" by not having to legislate austerity - the austerity will be inflicted by a 'controlled' Drachma devaluation. And the Greek economy can be 'stimulated' to whatever degree the Greek politicians want, using Drachmas.

It's not an ideal or permanent solution. But it would probably give the Greeks (and the EU) time and 'maneuvering room' to attempt to resolve Greek solvency issues. At the very least, it allows the Greek government a mechanism to deal with it's internal commitments without having to do so with a 'hard' currency such as the Euro. And it allows the EU and ECB a mechanism - the exchange rate - to encourage/compel the Greek government to get it's fiscal house in order.

Chris Koresko writes:

This post, and the Financial Times article it quotes extensively, are germane. The quoted article starts, I can see only one mechanism that could force a collapse of the eurozone: a generalised bank run in several countries.

HaTUN writes:

"he U.S. government tells us that public employees are compensated well above average because they are, well, well above average (shades of Lake Wobegon). Imagine how the U.S. economy would boom if these very able people found themselves creating companies"

Often on message boards, I find government employees saying how experienced they are, and how they get easily get higher paying jobs in the private sector.

I always encourage them to do just that. If they make more money, its better for the economy. They pay more in taxes. They open a slot for someone else in their previous position. Its all win-win.

They usually never reply to such encouragements.

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