The disaster of the Greek economy proceeds as they go to the polls today. In the Wall Street Journal we hear that it’s a close race:
ATHENS—Greece’s conservatives and radical left Syriza parties were in a statistical dead heat in a race too close to call, early exit polls showed Sunday, an outcome that could fuel investor fears over further political uncertainty in the 17-nation euro zone and coming just hours before the first Asia-Pacific markets open for trade.
The left wants to tell the rest of the EU to go pound sand. The right fantasizes that it can stay in the European Union, but renegotiate its debt with it’s creditors. Neither is particularly likely to be able to do anything but default. What I can’t figure out is why they haven’t already declared bankruptcy. After all, it was the foolish European banks that lent Greece all those billions of Euros at such low interest rates. Take a look at this chart from data published by the European Central Bank (ECB):
What fool thought that Greece was suddenly going to be a good risk when its currency was denominated in Euros instead of Drachmas?
Why not just declare bankruptcy? Why do they have to leave the Euro? That’s a question the
Grumpy Economist John Cochrane has been asking for months. Here’s an excerpt from a recent post:
There is an option. Sovereign default. Let banks fail — meaning their senior debt becomes equity and they are recapitalized. Good banks buy the assets of bad banks. But the Europeans probably won’t have the stomach for it.
He then quotes from Paul Krugman, who was reasonably predicting that the bad risk countries would soon leave the Euro in a “bank jog”, as opposed to a run.
This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.
back to Cochrane.
Comment. Right again. The only thing keeping any money in Spanish and Italian banks is the idea that leaving the euro really can’t happen. Once it’s clear that exit, devaluation — along with likely currency controls, bank closures, deposit seizures, and sky-high wealth taxes — are on the table, the run will start in earnest.
The euro was explicitly set up as a currency union without a fiscal union. (And it turned in to one without a bank regulatory union.) That can work, a fact which practically all commentators ignore.
The central ingredient is: sovereigns who can’t pay their bills default. The European central bank does not print up euros to bail out sovereign creditors, either directly or via the subterfuge of lending to banks who then buy the sovereign debt.
The euro was explicitly set up this way. The main problem is, when the crisis came, nobody bothered to read the instruction manual.
Arnold Kling adds:
Actually, my understanding of the instruction manual is that governments were supposed to operate with responsible budgets. People did read the manual–and ignored it.
Which is the primary source of the crisis?
(a) trying to use a common currency when labor is not mobile between countries
(b) governments running unsustainable budgets
I vote for (b). However, you will not see many commentators on the left shouting from the rooftops that (b) is a problem. Instead, they do the opposite when they decry any attempt to rein in deficit spending as “austerity.”
A lot of people want you to believe that the progressive agenda is the victim of Angela Merkel and Paul Ryan. But an alternative perspective would suggest that it is the victim of arithmetic.
Back to the Wall Street Journal on the election:
Any new government will face Olympian hurdles as soon as it takes office, with a central administration threatened by a cash crunch within weeks, an economy in free fall and an angry public exhausted by two years of successive austerity measures.
Greece’s reform program is also well off track, following weeks of political paralysis. The first task facing Sunday’s winner will be to come up with €11.5 billion ($14.5 billion)—maybe more—of new austerity measures being demanded by the country’s creditors but which could further inflame public opinion.
As Arnold is wont to say, “Have a nice day.”