The reality is that finance is based in London and the US, and somehow discount the relevance of the devaluation of their own currencies, because it doesn't translate into immediate losses (if anything, devaluation of the pound or the dollar boosts domestic profits of companies with international operations, and the returns of investments in foreign-denominated securities...). So the 10+% deficits of the UK and US (not to mention the near-bankruptcy of many US States) don't seem to create all that handwringing... - or only inso far as to have calls for Social Security oe pensions or social transfer cuts... In the long run, we're all dead. John Maynard Keynes
what currency crises were like only 25 - nah, make that 15 - years ago
As I mentioned in another comment, Iceland's currency was destroyed in a day in 2008.
Not to speak of the Argentinean corralito crisis in 2001, Russia in 1998, and the Asian Tigers in 1997.
It's just that, in a typically smug fashion, the Angloamerican Masters of the Universe from the City and Wall Street thought it could never happen to us. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I just read an economist tell an old joke about two pilots that fell into a jungle. They hear a lion roar and one of them puts on running shoes. The other says to him, "You can't outrun a lion." The first guy says, "I don't need to outrun the lion, I need to outrun you."
Greece is like the latter. In the midst of a global meltdown, and really in the midst of a global market, they became complacent. It's not the recession that has caused this but a race to the bottom. When you're competing with the third world in an increasingly competitive market, you better figure things out quickly or you will get picked off. The problem is, humans aren't equipped to go from eating steak to cabbage so quickly. And therein lies the problem.
Given European political support for lower income workers over the last two centuries, this wouldn't normally be a problem because welfare and wage policies would reverse the transfer back to such workers. But Krugman is arguing that the Euro puts obstacles, perhaps deliberately, in path of the welfare state model because it reduces the available options to mitigate poverty to those of a politically explicit nature: Only if governments have both the fiscal capacity and political will to increase net welfare/wage transfers can high unemployment and resulting deprivation be structurally addressed. Where that capacity and will have become limited, it's workers who lose, not bankers and traders.
If a European country with persistent high unemployment had its own currency, even if political authorities were unable to address the problems of deprivation themselves, market forces would eventually do the job for them by devaluing the currency to the point where domestic industry and exports grow again. Krugman's argument is thus that the euro is a more neo-liberal policy framework for much of Europe than a floating currency regime would be. It benefits traders, bankers, and funcionarios at the net expense of many common people.
Why should Greek debt suddenly have become more trustworthy because it was in euros? Is Californian debt more reliable because it's in dollars than in local IOUs?
The markets made a mistake, which meant a massive windfall for Spain, Portugal, Ireland and Greece for 10 years, now coming to an end. it's back to normal evaluations, and more realistic debt prices for these countries, but it's not the end of the world. In the long run, we're all dead. John Maynard Keynes
In theory, as I understand it, interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment. Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro. This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole. And this was one of the arguments presented for the introduction of the euro.
Or am I full of it?
interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment
The European Central Bank sets a single base rate for all of the EU.
However, you are right that there are credit spreads between the different Eurozone sovereign debt issues, as well as between firms in different sectors and countries.
It is possible that, because of monetarism, too much importance is attached to the single base rate set by the ECB where it is the other market-set interest rates that matter.
Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro
This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole.
I think the macroeconomic convergence must come from local inflation differentials which cannot be compensated by the various Eurosystem central banks by means of different local "base rates". En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
The problem is that a country with a good social welfare system that also has a first class education and training system may pass by training workers to compete in this highly competitive atmosphere. Greece is not that country. It's lack of diversification is it's problem.
I know this is not going to happen, but if it devalued, Greece would also find that the lack of diversification would be a big boon to the welfare of average citizens. Tourism and Int'l Shipping still make up more than 50% of GDP, and then there's trade in agriculture etc. With the flight of capital from the country, the fourth pillar of the economy (Banking) is about to be brought to its knees) but nonetheless, Greece's three main industries are still competitive and they bring in lots of outside dollars. Unless the shipping owners re-register their ships elsewhere--in an incredible show of cowardice--Greece has the easy means of improving the situation of its citizens. A cheaper tourist destination would help people internally. Transferring shipping dollars into a devalued currency would also help. The problem of course is that you'd totally scare away foreign investment (but if you look at the statistics, foreign investment is abysmally low in Greece) and that you'd lock Greeks inside the country, just as they used to be when Greeks used to go on vacation to Bulgaria.
I'd say that Greece is more like Argentina than it is like Haiti.
