There was a time when Greece and the EMU used to really interest me. In the early stages of the Euro crisis there was a lot of confusion about what was going on and why the EMU is such a mess. Given my operational understandings of the monetary system I had something relevant to contribute. But that time has passed and the story has become stale because we are essentially in a holding pattern.
I still get tons of emails about Greece and the headlines don’t seem to focus on too much else. But we should be clear about something – the situation in Greece has not changed. It is status quo because the EMU as a whole wants it to be status quo. And that means that there is nothing new here and there probably won’t be for a very long time. BUT, since I keep getting lots of emails about this I will give a brief rundown of my view:
- The EMU is a single currency system just like the USA is. The reason the USA works and the EMU doesn’t is because the USA has a system of rebalancing whereby poor states get more federal funding than wealthy states. That is, the Germanys of the USA (California, Texas and NY) pay into what is essentially a system of wealth redistribution that keeps poor states (Mississippi, Alabama, etc) from defaulting on their municipal bonds once every two decades. If there wasn’t a single currency this rebalancing could occur through the foreign exchange rate, but that doesn’t exist obviously. So, the EMU is flawed because they don’t have Euro Bonds and a Central Treasury. It’s a little more complex than that, but not by much.
- Forming a system of redistribution like the socialists [snark] in the USA have would be unthinkable for the bigger socialists in the EMU [double snark]. So, it doesn’t look like it’s going to happen any time soon.
- So, Greece gets dragged through the mud here. And by “mud”, I mean a totally tragic and catastrophic depression. But it’s not like Greece is the victim here. They chose to enter the single currency system without realizing that it was flawed and that they would be a current account deficit country in that region. They should have hired some better economists to analyze the risk/rewards or they should have gotten some assurance that full unity was coming at some point. Wynne Godley explained this 20+ years ago….
Where does it go from here?
- My guess is that the core countries will hold onto the status quo. After all, this sort of single currency system isn’t that bad for current account surplus countries. So, if they can hold it together as is then they don’t have to redistribute wealth AND they can keep being the primary beneficiary of a cheap currency (both inside and outside of the EMU). They also don’t want countries to defect because that raises the nightmare domino risk where multiple countries leave and we end up with a long drawn out fiasco that creates huge uncertainties inside of the world’s largest economic region. Not to mention the fact that the bagholders of this debt could end up being the core countries just by virtue of being the largest economies in the region.
- In the long-run the EMU isn’t getting any smaller. Technology and geographical proximity is making that economy a very small place. Full integration isn’t a matter of if, but when. It could be 10 years from now or it could be 100. But it’s going to happen so the Europeans should probably come to grips with that. The EMU was a good idea. A necessary idea. But it’s not a good idea if it’s incomplete.
- My baseline outcome is that Greece will remain inside of the EMU and will slowly take some writedowns and “defaults” that don’t really change all that much in the grand scheme of things. Their economy starts, sputters, but basically looks stagnant. Basically, some version of more of the same. And this conversation will continue at times over the next few years until we do something substantive.
The big risk:
- The big risk is a colossally idiotic Greek exit from the EMU. This creates the domino effect risk (Portugal, then Spain, then Italy, etc) and it is nothing more than a short-term solution to a problem that is inevitably going to occur with some other countries in the single currency region (you can’t have surpluses without deficits elsewhere). Further, because the EMU is likely getting smaller in the long-run (more integrated economically) letting Greece leave solves a short-term problem that ignores the long-term.
In other words, nothing has really changed here since 2012. The EMU is unworkable, the core wants the status quo, Greece is suffering, write downs might happen, but the likelihood of a break-up looks low. Wake me up if Greece actually leaves. Then I’ll throw some new sheets in the wash for the inevitable bed wetting that will ensue. Until then, this is one big snooze fest.