Sunday, October 27, 2013

Costs of the Greek Exit From the Euro

"Huge, Massive, Crippling." Words like these are bandied about by European politicians when talking about the costs of a Greek exit from the euro.  But, we would like to know, in the words of Monty Python, "How big is it?"

A 2012 study which is still quoted today, comes from a private forecasting group, Prognos AG, commissioned by the Shaping Sustainable Economies Programme of the Bertelsmann Group. The summary is contained in Policy Brief No. 2012/06, "Economic impact of Southern European member states exiting the eurozone."

Unfortunately, it looks like a model of comparative statics underlies the conclusions of this study.  It really doesn't come to any measurable conclusions for the basic question.  Instead, just like the run up to our great bailout of the US financial system, it just cries wolf.

The basic conclusion?  "...Greece defaulting on its sovereign debt and leaving the European Monetary Union would in and of itself have a relatively minor effect on the world economy..."  The reissued Greek currency "would be devalued relative to all other currencies, and the scope of this devaluation remains every bit as uncertain as the extent of a (debt) haircut."  Wow.  This is deep stuff.  Even the remark about being devalued relative to all other currencies seems a bit flippant. What if an exit were accompanied by real economic reforms and a commitment to minimally enforce statutory tax collections?  I would surmise that the the devaluation compared to Italy, Portugal, and Spain, for example, could be less than the devaluation compared to Germany, for example.  So, from this study, we really know nothing new.

The totally speculative conclusion is that a Greek exit, "..could..undermine investor confidence in the Portuguese, Spanish and Italian capital markets and thus provoke not only a sovereign debt default in those states as well, but also a severe worldwide recession."

Look an exit from the euro is something that is not even legally contemplated, and there's no doubt that it would be extremely messy with lots of unforeseen, unintended consequences.  Hedge funds and profiteers of all stripes would make out like bandits.

However, the current house of cards has enormous costs associated with it as well, and any comparison to a Greek exit has to be based on better economic models and netted against the costs of the current inefficient, dysfunctional regime.  The ECB's failure to do its own job by quickly forcing European banks to mark down their holdings of European sovereign debt to some remotely realistic economic value is a disgrace.

A thoughtful Greek exit (and they certainly have lots of smart, internationally known economists) would be aimed at real economic reform, a healthy tax system including collection and enforcement, budgetary and pension reform, and an independent monetary policy for a currency whose initial devaluation would put into place adjustment mechanisms that would eventually allow sustainable growth.  In any case, Greek elected officials would once again be in charge of their affairs.  Can it be done?  Maybe.  Maybe not.

However, the current six year European economic hoax continuing into the indefinite future doesn't serve the interests of the peripheral members of the EU.

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