Thursday, May 31, 2012

Simon Johnson on the Euro

Simon Johnson has a good blog post on the end of the euro. Digging in, the run is on, the end is near, and the chaos will be worse than you thought.T he ECB has also monetized a lot more than you thought.

Still, I do not understand why even Simon cannot imagine the idea of sovereign default while staying in -- and firmly committing to stay in -- the currency union. The picture Simon paints of the euro breakup is a catastrophe. So why not even talk about sovereign default (restructuring) without euro breakup?

It strikes me as really the only way out, and the longer Europe waits, the harder it will be. 


  1. I agree on the connection between default and the eurozone. They bought into "default puts the whole system in doubt" and paid several times over for the mistake. At this point, who cares.

  2. John,

    I am confused. The Greeks take GOP tax policy, "tax cuts are good; they always bring in more revenue" apply self-help, and end up with the bad news from you that, "the chaos will be worse than you thought."

    From a political point of view it is imperative that the United States do everything it can to minimize chaos, it seems to me. We must become a force for stability and security for all of Europe.

    In your view, what steps can we take? About what do we need to be most concerned?

  3. Alexander, don't where you read that the Greeks applied tax cuts, they increased taxes.

    Dave, don't you think they would have been better off by defaulting early and not waiting around?

  4. John,
    Ok, I see and agree with your point on keeping default and "staying in the Eurozone" separate. Fine.
    However, allow me two comments/questions.
    One - Greece defaults, does not pay back its debts, then who will lend Greece money? Who will believe that Greece will honor its commitments in the future? I know, nobody believes that it can honor them now, but still, if it does not pay back what it owes, who will believe that will actually honor their commitments in the future?
    Two - you keep talking about the default issue; but it seems to me that Greece's problems do not end there. I think Greece's problems are that it is a low productivity country, with little capital, little amount of investment, that wants to finance a German style welfare state. It does not work. When printing its own money, it can pretend to be rich, and fool itself that it can finance a huge welfare state with cheap Drachmas. But now, it cannot.
    To solve this, Greece must lower its standard of living, and especially, it must reduce all its prices, including wages. This is, for me, the most important adjustment that Greece needs to do. They may be unwilling, but *within* the Eurozone, this is their only way out. Of course, they could devalue, and create their own Drachmas again, but nothing in history tells us that they will be able to manage their monetary affairs any better now than in the past, before they Euro.
    My point is - default is fine and dandy, but it is by far not the only thing that Greece needs to do. The Greeks must realize that with their low productivity they simply cannot finance a standard of living as the Germans or the Swiss have. And this seems to me that this issue is lost in the whole discussion about Greece.

    1. Agreed. Greece is about the size and economic performance of metro Detroit. Lack of its own currency to devalue is not what's troubling Detroit.

    2. How come? If Detroit could devalue, that would be a huge boost to the auto industry and to Detroit.


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