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And if Greece did default on its debt Merkel might now be taking about bailing out any German banks threatened by that default, but I can't see it making Merkel any keener on bailing out Greece itself.  Quite the opposite - I suspect Greece would then be excluded from any bail-out.

All you say is true but it's what we signed up for when we joined the EU and signed various Treaties.  If Greece does want to leave, the Lisbon Treaty, for the first time, provides a mechanism for doing so.  It appears to be generally accepted that Greece was accepted into the Euro based on falsified figures.  You reap what you sow...  A less inclusive Union might be talking about expelling Greece for so doing and endangering the currency Union as a whole.

There is a case for Greece leaving the Euro to enable a devaluation although I don't see how that addresses all the problems talos enumerates.  Indeed it might perpetuate them by remove the pressure on the Oligarchy.  It seems that it is Greece's oligrachy and systemic corruption that is its root problem and not membership of the EU/Euro which are probably more part of the solution than the problem longer term.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat May 15th, 2010 at 01:41:46 PM EST
[ Parent ]
There's nothing in the treaties that prevents Greece defaulting on its debt and staying in the Euro.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 01:47:15 PM EST
[ Parent ]
But Greece would still need to run substantial deficits to avoid a depression. Would that be possible after default and without help from a friendly central bank?
by generic on Sat May 15th, 2010 at 02:05:26 PM EST
[ Parent ]
Sovereign deficits? Certainly.

Current account deficits? Less certain, but still not entirely unlikely.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 15th, 2010 at 02:08:21 PM EST
[ Parent ]
If Greece stays in the Euro with all the limitations it implies? I wouldn't be so sure about sovereign deficits.
by generic on Sat May 15th, 2010 at 02:17:45 PM EST
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If push comes to shove, Greece can issue Greenbacks.

Then the deficit chickenhawks would have to either back down or move for expulsion. And the chickenhawks have a blocking minority, but they don't have a qualified majority.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 15th, 2010 at 02:22:50 PM EST
[ Parent ]
What is the mechanism for expulsion? I don't think there is one.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 06:06:07 PM EST
[ Parent ]
Then the deficit chickenhawks will need to make one.

Doesn't matter, though, they still won't have a working majority.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 15th, 2010 at 06:07:19 PM EST
[ Parent ]
Well you may expel them, but how do you actually stop Greece from using it?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun May 16th, 2010 at 10:21:40 AM EST
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Stop them from issuing Greenbacks?

You can't.

If the threat of expulsion from the relevant communities is not sufficient (and if the local population accepts the Greenbacks as payment for services rendered), the only way to stop them is sending in the gunboats.

But of course, if they are forcibly ejected from the €-zone, they would have no particular reason to issue Greenbacks instead of just printing their own money.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 16th, 2010 at 01:45:47 PM EST
[ Parent ]
What is to prevent e.g. Iceland declaring that the Euro is now its national currency?

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun May 16th, 2010 at 09:38:01 AM EST
[ Parent ]
Nothing.

But they can't print €-notes or mint €-coins without permission from the Bundesbank.

Well, actually they can, but the official EU stance would be that they were counterfeiting.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 16th, 2010 at 01:47:58 PM EST
[ Parent ]
I think Greece's 120% debt-to-GDP ratio would corresponds to the need to pay about 7% GDP in interest, and roll over about 25% of GDP in principal.

So, a default would free up about 30% of GDP in government expenses. Though, in terms of reducing deficit, only the interest payments would count.

So I'm not sure Greece couldn't make do just with the tax revenue. Plus, they could issue some sort of IOUs redeemable in payment of state taxes as a form of currency.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 06:04:15 PM EST
[ Parent ]
I didn't say there was, but there is also nothing in the Treaties to require other countries to bail Greece out or to continue lending to Greece.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat May 15th, 2010 at 02:38:15 PM EST
[ Parent ]
There is an assumption that the European Model has a component of solidarity. Without solidarity I suspect the EU is not something most people would want to be a part of.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 06:05:13 PM EST
[ Parent ]
yep, but the basis of solidarity has to be honesty, transparency, accountability, trust, reciprocity and mutuality.  I recognise that we are talking about unequal relationships in many cases, but why should German taxpayers bail out Greek Oligarchs any more than the EU tolerate/support the emergence of a military Junta in a member state?  

We are working through many issues regarding true democracy, transparency, accountability etc. in many member states.  Tolerating it in one member state does the other members states no favours whatsoever.

In that sense the EU IS going through an existential crisis.  The many areas of agreement and solidarity encoded in present Treaties have proved inadequate to deal with the Global banking/financial/economic/political crisis and the absence of sufficient fiscal integration and mutual oversight has proved key in this instance.  

Other issues that perhaps need to be tackled on an EU wide basis include media monopolies/oligopolies, banking regulation, financial transaction taxes (Tobin Tax) etc.  Even Merkel has recognised that existing Treaties are inadequate, but is it feasible to propose a new Treaty so soon after Lisbon?  Expect national oligopies/bourgeoisies to go ape-shit, and not just in the UK.
 

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun May 16th, 2010 at 05:35:31 AM EST
[ Parent ]
You forget mental capture by ignorant economists.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun May 16th, 2010 at 06:28:43 AM EST
[ Parent ]
yep, but the basis of solidarity has to be honesty, transparency, accountability, trust, reciprocity and mutuality.

And if the demands currently placed on Greece were about any or all of those things, nobody here would be complaining.

But they're not, so we are.

I recognise that we are talking about unequal relationships in many cases, but why should German taxpayers bail out Greek Oligarchs

What's happening right now is that the Greek taxpayers' children are bailing out the German oligarchs.

The "Greek bailout" is mostly a bailout of German banks, and the Greek taxpayers (and the Greek poor, through lack of public services) are going to pay for it (it's a loan, not a gift). A Greek default would be a bailout of the Greek (ordinary citizen and oligarch alike) at the expense of the German oligarchs.

Me, I fail to see the problem with fucking over some oligarchs - hence my acceptance of a default scenario.

(Similarly, capital controls is a way to prevent the Greek oligarchs from absconding from the country - they helped make the mess; they can damn well stick around for the cleanup.)

More generally, Greece will default unless either
(1) Germany stops depressing domestic demand in the service of a mercantilist inflation policy
(2) the EU establishes redistribution programmes that counteract the German mercantilism (which would effectively turn the German mercantilist policy into subsidy by the German taxpayer to the German export industries)
(3) Greece imposes capital controls to bring its trade into balance.

The cash flows being what they are, there is no question about that fact. The only question is how much the Greek people are going to suffer first.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 16th, 2010 at 06:29:42 AM EST
[ Parent ]
the EU establishes redistribution programmes that counteract the German mercantilism (which would effectively turn the German mercantilist policy into subsidy by the German taxpayer to the German export industries)

You mean the German taxpayer hasn't been already subsidizing the German export industries?

Let's look at German economic policy under both Schröder and Merkel:

  • stagnant real wages in Germany - check!
  • unconstitutional reduction of the German social safety net - check!
  • running deficits during the growth part of the business cycle - check!
  • increasing public debt even when above the 60% GDP threshold - check!
all this while running a substantial trade surplus - which is only possible with supply-side tax cuts to "stimulate" growth, which was stagnant precisely because of the suppression of internal demand. Let's also recall how in 2005 Germany lobbied to relax the enforcement of the Growth and Stability Pact which it was violating. Let's also remember how Germany kept its borders closed to new EU member states labour on the grounds that their economic growth was sluggish, while at the same time going on a capital shopping spree in the new entrants, siphoning business profits off from the periphery into Germany.

So the German oligarch have already been bleeding the German people dry for at least a decade. Meanwhile, the German banks lent money to the peripheral economies so they could buy German products. In 2009 the German government has been busy bailing out the German banks.

It is impossible - unless you're a Serious Person - to take any pronouncements coming out of Germany seriously.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sun May 16th, 2010 at 06:48:42 AM EST
[ Parent ]
You mean the German taxpayer hasn't been already subsidizing the German export industries?

Yes. The German worker has. But the German taxpayer hasn't. Taxpayers include (in theory) the employers.

At the moment, the subsidy schemes are from workers to employers and from net importers to net exporters. A redistribution system that evened out the current account imbalances would add a redistribution scheme from taxpayers to export businesses on top of those.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 16th, 2010 at 07:45:55 AM EST
[ Parent ]
Paying taxes is for little people.

And politicians no longer address themselves to workers but to taxpayers...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sun May 16th, 2010 at 07:50:20 AM EST
[ Parent ]
The basis of solidarity doesn't matter. What matters is that conservatism is correlated with a perception of belonging to a smaller "we" which is the subject and object of solidarity.

Oligarchs are extremely narrow-minded and selfish. Conservatives such as Merkel somewhat less so.

The EU is doomed by lack of solidarity in the face of any crisis (let alone one of the magnitude we're facing) as long as the EPP is the dominant political force, as it is currently.

Market worship has both been a cause of the crisis and a factor in making it worse.

There is also a moralistic undercurrent to all this, that somehow pain is virtuous. How Christian (Democrat).

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sun May 16th, 2010 at 06:38:48 AM EST
[ Parent ]
How much distaste do German leaders and German banks really have for Greek oligarchy?

The Greek debt problem is not new.

It has been there for a while.

In the interim, Greece and Germany traded favors. Greece received political support and Germany received huge orders from Greek on armaments and other projects.

Were Germany actually concerned about corruption and oligarchy in Greece, one place to begin nipping the Greeks in the bud would be: stop bribing them to buy your stuff.

This doesn't mean that Germans are to blame for Greek corruption, but the Germans certainly should not act surprised.

When you look at the banking crisis continentwide, a lot of dirty behavior seems to be tolerated by these leaders.

by Upstate NY on Sun May 16th, 2010 at 09:44:26 AM EST
[ Parent ]
membership of the EU/Euro which are probably more part of the solution than the problem longer term

Over the next 10 years the BundesbankEU is going to cause a depression through Hooverite macro policy.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 01:51:04 PM EST
[ Parent ]
Depends entirely on what you define as the problem. What causes the crisis is the policy straitjacket and the perception that there is a crisis. Everything else is incidental.
If the financial markets suddenly decided that Austria or the Netherlands could be squeezed they too would have a funding crisis.
by generic on Sat May 15th, 2010 at 02:02:19 PM EST
[ Parent ]
Trichet is on the record claiming that the problem is not one of speculative attack but of "market failure".
Jean-Claude Trichet vergleicht die Situation der Euro-Staaten zum Ende vergangener Woche mit der Zeit kurz nach dem Ausbruch der Finanzkrise: "Die Märkte funktionierten nicht mehr, es war fast wie nach der Lehman-Pleite im September 2008."
Again either Trichet or Spiegel date the start of the financial crisis to Lehman's failure in September 2008, instead of July 2007. It boggles the mind that everyone has forgotten how liquidity completely dried up in the interbank money market for most of the month of August of 2007.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 02:07:11 PM EST
[ Parent ]
Which countries are most vulnerable to a market run?

There are two considerations: Debt to GDP ratio and country size. Here's a picture of the Eurozone:

The diagonal lines are at 75%, 60% and 50% Debt-to-GDP ratio. 75% and 50% are the 1st and 3rd quartiles of the Eurozone, and 60% is the well-known Growth and Stability (suicide) Pact threshold.

Smaller countries are most vulnerable to a market run because it take less capital at risk to manipulate their debt market. Countries with a higher Debt-to-GDP ratio are also most vulnerable because the threat of default can be talked up more credibly.

It looks to me like Belgium and Portugal are next after Greece. Italy is an attractive target, but too large. Austria, the Netherlands and Ireland would be a second tier, of which Ireland has already capitulated and both bailed out their financial sector and engaged in "model" fiscal austerity.

Maybe looking at deficit would make Spain look more vulnerable, but on Debt and GDP, it is only a 3rd tier prey for the wolfpack.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sat May 15th, 2010 at 07:19:07 PM EST
[ Parent ]
Eh. We all know perfectly well that the economic indicators have nothing to do with it, nevermind the economic reality.

There are three conditions that must be met to qualify as a target:

  • You must be big enough to be worth going after - so Malta and Cypern are probably safe.

  • You must not be big enough to suffer from imperial phantom limb pain - that might make you cut the banksters off at the knees, and we can't have that.

  • You must be populated by brown people or Russians.

Any country that meets those three criteria is at risk of being attacked by the piranhas. Any country that does not is (probably) safe, unless they do something outrageously, Iceland-level stupid.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 15th, 2010 at 07:40:49 PM EST
[ Parent ]

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