Friday, September 30, 2011

2012, here we come.... (#9)

While politicians from both sides of the pond have been attempting to reassure markets by reiterating their determination to kick the can ever further down the road, leading economists have, rather unhelpfully, already called the end game.

Nouriel Roubini, that fraternity's reassuringly nicknamed Dr Death, was first off the mark as usual.

"Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma."

Acknowledging that there are no real rules in place for how this might be achieved, and that both a good deal of international trauma and 'collateral damage' are inevitable, he too cites Argentina's pesification of its dollar debts and those dodgy folk on Iceland as examples of an effective emergency response.

Aside from an immediate restoration of competitiveness, Roubini mentions the more dubious secondary benefit of other Eurozone economies being able to see clearly just how screwed over the Greeks end up and thus having "a chance to decide for themselves whether they want to follow suit, or remain in the euro, with all the costs that come with that choice."

Others, while also favouring an orderly default, find the prospect of a Greek euro-exit too scary, while Citi's Willem Buiter believes it won't do any good anyway in terms of restoring competitiveness. In this he has been backed up by Ian Bremner, Visiting Fellow at LSE, who adds that

"The problem with this line of argument, however, is that Greece actually is less exposed to international trade than any other eurozone country. Only €16bn of its €230bn gross domestic product is export-based. True, the tourism industry does comprise a significant 15 per cent of GDP, but a devaluation would have limited upside against Greece’s less expensive Mediterranean competitors such as Turkey. Worse, Greece has a mountain of debt denominated in euros. A switch to a new drachma would not change this. In fact, the drachma’s devaluation would only make the debt that remains that much harder to pay off."


"No legal framework exists for an exit from the euro. Greece would have to negotiate with its eurozone partners, and most likely with the 27-member European Union. It would be a prolonged and messy process, creating a political and economic drag for everyone involved."

As of yesterday it is advantage can kickers for the time being. Merkel has got through her local vote on the EFSF with her majority intact, but it won't be until the second half of next month that all the other members of the EU have caught up...around the same time that the Greek state starts to run out of money for pensions and salaries.

Anyway, the spectre of a catastrophic collapse before the next crucial German vote on EFSF2.5 in early 2012 does seems to be receding; the policy makers appear to be making the present state of traumatic uncertainty that much more durable with their not quite satisfactory fixes.

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