Why Greece Should Reject the Euro

[Barnabas]

There are few better places than the greek Islands, MRT is right, Greece has the best combination of beaches + ruins to be a touristic powerhouse.

[C0ckney]

Please do.

Just wondering, why would the German banks decide to get so heavily involved in Greek sovereign debts that a Greek default could cause them to collapse?

i'll try to type it up tomorrow when i have more time.

to answer your second question, why would banks give vast amounts of loans to people who couldn't pay them back and then package and sell the loans to each other? a combination of greed, incompetence and the (sadly right) belief that governments wouldn't allow them to fail when the bubble burst.

it's worth noting that these bond holdings have been built up over time. so a german bank may have bought some 10 or 30 year dated paper 5 years ago when greece's situation looked much better, but now that paper is worth much, much less. so you might be thinking that many banks are sitting on large capital losses on this sort of paper as we speak, and you'd be right. now you might then think that these losses would be causing these banks difficulties right now, and that they would, for example, show up on the much talked about stress tests conducted by the ECB etc. however, what the banks do is state that they will hold all these bonds until maturity and therefore they are not included in the stress tests! this is used to hide the true positions of these banks and is known as an 'accounting trick'. in other walks of life, it would be called 'fraud'.

[VetLegion]

I'm not sure if there was ever a referendum about the Euro in Germany.
IIRC, there was not.

The Euro is not a German imperialist scheme, and Germany would in fact
benefit from leaving the currency, as well as the union, since both siphon
at least some wealth away without giving anything in return.

[BeBMan]

Well, some say Germany also profits most from it, so maybe it's still an imperialist scheme. Esp. since Germany is evil for both buying and not buying from Portugal

[VetLegion]

How would it profit? Germany is a savers' nation, one of few in Europe, maybe the only,
so it stands to lose from inflation... which is the preferred "fix" for everybody else.

[Barnabas]

If the Euro did not exist, Germany's national currency would be even more expensive, right? So perhaps Germany benefits a little from the more competitive Euro, as expensive as the Euro still is, like 1.4 dollars.

I don't think the EU is German imperialism, I think its existence is more related to romanticism, idealism, trying to prevent another european big war, and uniting in order to still be relevant in a world in which to be a big power you need to have hundreds of millions of inhabitants (The US and the Soviet Union in the past, the US, China and India now)

For Spain, Greece, Portugal and many other countries, the EU meant loads of free money

[BeBMan]

There are several arguments about that, the central point as I remember it goes that if everyone gives up the Euro and goes back to his national currency it would mean that the D-Mark would get indeed much stronger, while many other former Euro-using countries would get back to national currencies that lose value.

Those guys making the argument say this would mean that a number of southern European countries wouldn't buy much German products anymore. They relate the German strength in exports (which goes mostly into the Eurozone) in recent years to a good part to the existence of the Euro.

Dunno if that's all true, I don't claim to be a financial Guru, and currently you have experts from all sides with contrary views on what's best, and what will happen. Also, if it's true that Germany wins from the Euro it would still not mean keeping it would also be the best for Greece.

[giblets]

If the Euro did not exist, Germany's national currency would be even more expensive, right? So perhaps Germany benefits a little from the more competitive Euro, as expensive as the Euro still is, like 1.4 dollars.

Don't countries with high savings rates typically have lower exchange rates?

[OneFootInTheGrave]

There are several arguments about that, the central point as I remember it goes that if everyone gives up the Euro and goes back to his national currency it would mean that the D-Mark would get indeed much stronger, while many other former Euro-using countries would get back to national currencies that lose value.

Those guys making the argument say this would mean that a number of southern European countries wouldn't buy much German products anymore. They relate the German strength in exports (which goes mostly into the Eurozone) in recent years to a good part to the existence of the Euro.

Dunno if that's all true, I don't claim to be a financial Guru, and currently you have experts from all sides with contrary views on what's best, and what will happen. Also, if it's true that Germany wins from the Euro it would still not mean keeping it would also be the best for Greece.

It as usual works both ways - if Greeks stay within Eurozone they will have to pay off the debt under unfavourable conditions, but they get the "bailout" and get to try and fix their economy, even if under the "iron fist" from Germany... if it really gets bad personally (ie high unemployment), they still have the (personal) option to move out and work somewhere else in Europe (hello US style worker mobility), so for someone capable and willing to work - it is not necessarily totally bleak... sure will not be good for thousands state workers that may/will lose jobs but I feel that it is better than the alternative.

Which is Greece dropping out, starting with soft defaults, but the state mismanaging the affairs even further (as the current situation is not the result of responsible fiscal behaviour in the first place), resulting in hyperinflation, high unemployment and potential political penalties such as loss of ability to move within Eurozone, dependable on what kind of penalties EU would sanction for Greece leaving the monetary union.

So from the two evils - I think that staying in and "suffering" foreign imposed rebalancing is the lesser of the two. If Greek government had the the guts to cheat EU from within, how will it behave "off the hook", hard to believe they will be any more responsible than they were... who will invest there under those circumstances, even if it's cheap... Greek issues are not really with being expensive, but are deep structural state governance issues which will not go away with them leaving Eurozone. So IMHO while the pain will be great as it is, it would be even greater if Greece opts out.

[Tuga]

the (personal) option to move out and work somewhere else in Europe (hello US style worker mobility).

The Fawlty Towers Manuel character sindrom lurks under every foreign language worker in the UE.
How many national languages in the UE? It is not the same situation as in the US, with just one language.


Also, when you move abroad in the UE, all the litle cultural details change, like food, books, drivers attitude, house and cleaning habits and many others. Thats an uneasy experience, to move and change a lot in everything. In the US it feels good to move and change a bit.


There is much more diversity in the UE than in the US. So, US style solutions sometimes backfire.

[Zoetstofzoetje]

que?

[C0ckney]

The Fawlty Towers Manuel character sindrom lurks under every foreign language worker in the UE.
How many national languages in the UE? It is not the same situation as in the US, with just one language.


Also, when you move abroad in the UE, all the litle cultural details change, like food, books, drivers attitude, house and cleaning habits and many others. Thats an uneasy experience, to move and change a lot in everything. In the US it feels good to move and change a bit.


There is much more diversity in the UE than in the US. So, US style solutions sometimes backfire.

despite all that there has been plenty of movement of people within in the EU since it was founded up to and including the present time. the italians going to germany in the 60s/70s, the british moving to france and spain in the last 25 years, the eastern europeans coming to the UK since 2004 and at the moment the spanish going to germany, to name but a few examples.

portuguese people have been emigrating for a long time, whether to spain, france or nothern european countries or further afield to brasil. it's actually a problem for portugal going forward, because many of its best and brightest choose to leave for a new life abroad.

[C0ckney]

onefoot, a few comments on your post

1) greece's problem is that it cannot pay its debts as things stand, any reasonable analysis will tell you this. the markets are telling us this by their behaviour.
2) they have already had a bailout/rescue! it has been such a dismal failure that 12 months later they need rescuing again. it is not the greeks who have badly mismanaged their affairs, the EU has been totally incompetent in this. what is happening is that the 'troika' are trying to solve a solvency problem with liquidity. a problem of an unsustainable debt with more loans.
3) of all the things the EU is likely to do in response to any move by greece to leave the euro, restricting freedom of movement is pretty far down the list. i'm actually reasonably sure they can't do this, as it's written into treaties which long pre-date the euro. they may kick greece out of the EU, but that's the nuclear option.

while a default is not a magic bullet and will create some serious problems, it will improve the situation in a number of ways. firstly it will reduce greece's debts to a more manageable size, i.e. to the point where they can actually pay them. this will have an effect and its public finances, less money going to pay debt interest means more for other things (for reference the IMF predicts that greece will spend 6.5% of its GDP on debt interest payments in 2011 - it is also worth noting that greece's deficit is larger than this). it will also have a knock effect on its economy as money that is not paying debt interesting can be used to stimulate growth in other ways. it would have other impacts such as really forcing the greek government to get serious about reform i.e. collect more taxes and spend more responsibly. it would allow a new greek currency to fall in value and therefore make greek goods and services more competitive, although this won't be a panacea it will obviously help.

[OneFootInTheGrave]

1- sure, and we will surely be certain whether it happens or not this in due time... looks likely as it is
2 - I am also sure that the EU has wasted all that cheap money that the Greeks managed to borrow during the good times... or maybe not, it might have been the Greek government themselves ... a shocker I know

and that has nothing to do with liquidity or how EU is addressing the "financial crisis" in general...

3 - Ok, if you see it "set" as such, but having the issue with few tens of thousand North African refugees right now, hundreds of thousands of Greeks coming over may become a lot less appealing, especially if it is seen that Greece is abusing the rest of the EU with exit from the monetary union and the political damage it brings along...

as for the rest

not sure what you are reading in the UK, but that sounds like Telegraph to me ... while good in theory, in practice Greece is not in trouble because of it's 6.5% of interest payments on debt, but because of all other unsustainable government expenditures. Thus the problem that is really there is structural, and not with the "bailout" itself... while the bailout terms make the restructuring more drastic, it pales in comparison to letting the Greek gov loose and trying to bail itself out via inflation.

The real issue is with

really forcing the greek government to get serious about reform

, and there is nothing at all to suggest that leaving the Eurozone and defaulting would force them to start behaving more responsibly, IMO - exactly the opposite. Keep everyone employed, let the currency plummet so everyone together is getting less paid, prolong and mask the problem with sinking further into the hole, that is much more likely outcome. Leaving the Eurozone is not some magic "freedom" bullet that the Greeks need to take to resolve their structural issues, and that option is worse than staying in and getting on with the program. I would bet more on German "iron fist" to make Greek gov behave, than on Greek gov itself... it is like putting the drunk driver loose on the road again after he crashed already, hoping that he will drive "better" if on his own again.

Any positive effects of lower debt burden and more competitive currency will be dwarfed by the same government incompetence that brought Greece where it is right now, in the first place... as a side note - it is also amusing to observe how UK media fails to spot this obvious point.

[C0ckney]

1) i can't parse this. i have no idea what you're trying to say here.
2) i made a mistake in my post. it should have read 'it is not only the greeks who have badly mismanaged their affairs'. leaving that aside it's obvious that the previous rescue failed and that 'more of same' is not going to succeed.
3) i don't think that's what will happen. in any case 100,000s of people left eastern europe and came to britain and ireland as economic migrants in and after 2004, which is a far more relevant example than libyan refugees.

firstly, i live in brasil but i have been following the crisis closely. secondly, i'm not going to guess where you get your information from, as so little of it is grounded in reality. do you work for the european union by any chance?

while good in theory, in practice Greece is not in trouble because of it's 6.5% of interest payments on debt, but because of all other unsustainable government expenditures. Thus the problem that is really there is structural, and not with the "bailout" itself... while the bailout terms make the restructuring more drastic, it pales in comparison to letting the Greek gov loose and trying to bail itself out via inflation.

the greeks can't 'bail themselves out with inflation' because their debt is denominated in euros, so needs to be paid back in euros. this is one of problem that a default would cause as the new local currency would no doubt fall in value against the euro very quickly.

greece has two major problems (which we have both already mentioned), its debt and its structural problems. its debt is huge and the interest payments are too. it's costs for taking on new debt are enormous, to the point of being completely prohibitive. it's structural problems are very serious too and it has shown very little desire for real reform. it needs to solve both.

and there is nothing at all to suggest that leaving the Eurozone and defaulting would force them to start behaving more responsibly, IMO - exactly the opposite. Keep everyone employed, let the currency plummet so everyone together is getting less paid, prolong and mask the problem with sinking further into the hole, that is much more likely outcome. Leaving the Eurozone is not some magic "freedom" bullet that the Greeks need to take to resolve their structural issues, and that option is worse than staying in and getting on with the program. I would bet more on German "iron fist" to make Greek gov behave, than on Greek gov itself... it is like putting the drunk driver loose on the road again after he crashed already, hoping that he will drive "better" if on his own again.

i'm sorry but this is just garbage. i already said explicitly that leaving the euro and defaulting is not a magic bullet and will create some serious problems, and you have just repeated what i said and coated it with a layer of ****e (sorry i'm trying not to be rude, but seriously...).

greece has spent years running its finances badly. it did not collect enough in tax and spent too much money, this is well known.

some simple facts:

greece's debt is unsustainable. they are insolvent. the markets do not believe that they can finance their existing debts. if you don't want to take my word for it, go and look at greek bond yields (i.e the rate it has to pay to borrow new money). we have already had a rescue from the EU (or under a german 'iron fist' as you would put it). it has failed so completely, that, 12 months on, we are talking about another 'rescue'. various conditions were attached to this failed rescue, including a whole raft of reforms. the pace of reform though has been glacial. it is ridiculous to assume that 'more of the same' will produce different results this time around.

default is the best of a set of bad options. that things have been allowed to get this bad is a scandal. the EU, the greek government and the ECB have all contributed to this mess.