Tuesday, October 11, 2011

Be careful what you wish for

In my survey of international economics class today we had an excellent discussion of possible end-games for the current Euro crisis.

One point that really struck home with me was when a student asked "Why did Greece even want to be in a monetary union with Germany in the first place"?


Greece was a serial defaulting, non-tax collecting, relatively corrupt, but seemingly happy country. They were never going to be Germany, and I can't understand why they wanted to be Germany. Yet they moved heaven and earth to meet the Mastricht criteria and get into the Euro. They hired Goldman to swap around their future revenues, and maybe they fibbed a little bit too. At the time, many people were surprised that they made it in.

Short term, they got a ton of cheap (for them) credit and enjoyed a spending binge. But their economy grew ever less competitive and their external position ever weaker. Now they are down and out, humiliated, wracked by social unrest, and pretty much flat broke.

Yet they still want to stay in! People, Greece is never going to be Germany. I don't say that as a negative about Greece but as a statement of history/culture. The values are different, the comparative advantages are different. Thus, German monetary policy is not really ever going to be right for Greece. Unless Germany is willing to adopt them and put them on a perpetual allowance, the Euro is not going to work out for Greece.

It's time for Greece to pull the full Argentina, or as Hillary likes to say, press the reset button.


Anonymous said...

"German monetary policy is never going to be right for Greece"

This is a true statement, but it doesn't mean that Greek central bank's monetary policy would be any better. The reason for why Greece (and other similar countries) are joining euro is not that they believe that ECB would lead ideal policy, but that it's policy is still going to be better than what they had.

Greece had double digit inflation for decades, that's why they needed and wanted Euro, not to mention that probably 80% of their trade and tourist receipts are in euros.

In fact, Greece is a textbook case of a country that needs to fix it's exchange rate.

Anonymous said...

on the other hand, to continue your argument, why would Wyoming want to be on the same monetary union as Massachusetts, for example? :-)

Angus said...

common history, values, language, labor market mobility, fiscal transfer union in place.......

Anonymous said...

Greeks and Germans also have common labor mobility and fiscal policies, this is what the EU mean, actually.

Doubt that the other "cultural stuff" details matter as much as the way the economy is managed, as Greeks and Germans mingle, or share values thereof, as much as the dudes from Wyoming and Massachusetts do.

But, otoh, as stated in the first comment from above, EU was an aspiration for the Greeks, as they thought that their poor management skills (which can be a cultural thing, I give you that) will be solved over night by joining in. They certainly didnot think "they would become Germany" :-)