Greece

[Wonk]

I don't usually pay attention news anymore, but I wanted to peek into the Greek drama to see what has changed in the last few months.  Apparently nothing yet. 

Let me ask a question.  No one in the world actually thinks the Greeks will find fiscal religion and grow their way out with austerity--much less pay back their debt--do they?  Seriously.  Is there a person in the world who believes this scenario has even a 1% chance of happening? 

I'm inclined to think this process is carrying on for as long as it takes to insulate the rest of the world for when Greece is ultimately expunged from the EU and switches back to the drachma in order to revalue.  Although stranger things have happened, I imagine the only 2 scenarios we'll see in 10 years are either:

1. Greece leaves the EU, the rest sort it out
2. The entire EU goes down in a ball of flames

What do you guys think?

[moda0306]

Wonk,

Greece is one big debtors prison right now (with nice beaches and wonderful Gyros (but not enough Euros!!... get it?)).  Much more of their own making than other PIIGS countries, but it's too self-fulfilling at this point to reverse.

Thing is, what if Greece leaves the EU?  Reform all contracts in a new currency, but this time pulling OUT of a monetary union, thus closing up easy capital flows?

Yikes... I don't know... the situation is too screwed up and big to navigate through.

[Gosso]

Here's a funny video telling us that a Greek default will NOT happen "today" (two minutes):

http://youtu.be/Rf9Wa9M9V98

"Well you know today includes tonight"
"Very sound fundamentals underpin the economy, such as, confidence, astrology, rumours"

I would laugh, except it is just so sad.

[MediumTex]

I want to know who thought it would be a good idea to let Greece into the EU, given Greece's history of being more or less continuously in a state of default for decades.

[moda0306]

MT,

Methinks people that could make money while the music was playing, knowing the music won't stop until after they've cashed out and are sitting on a nice pile of German bonds.

But that's me being cynical.

[Storm]

I want to know who thought it would be a good idea to let Greece into the EU, given Greece's history of being more or less continuously in a state of default for decades.

It was probably Germany.  Before the EU Germany had a relationship with Greece and the other southern Euro nations similar to our relationship with China - goods could be manufactured at bargain prices and dumped wholesale onto the markets of the wealthier nations.  Manufacturing in Germany was being outsourced to cheaper Eurozone countries.

The scheme to get everyone on the Euro was most likely thought up by Germany to protect their manufacturing base.

[stone]

I thought that Germany was pretty much coerced into the Euro by France but the theoretical background came from an American Nobel prize winner http://en.wikipedia.org/wiki/Robert_Mundell.

When Germany reunified, France was scared that Germany would become over dominant and  bizarrely thought that the euro would avoid that

[Gumby]

I thought that Germany was pretty much coerced into the Euro by France but the theoretical background came from an American Nobel prize winner http://en.wikipedia.org/wiki/Robert_Mundell.

When Germany reunified, France was scared that Germany would become over dominant and  bizarrely thought that the euro would avoid that

Germany is actually the one that first conceived of the Euro — decades before Mundell ever had the idea.  Germany has wanted to have a common European currency since the late 1920s. And, in fact, the German Mark was the currency foundation for the Euro. And the Mark was the first European currency that ceased to be legal tender (on Dec 31, 2001) in the transition to the Euro.

http://en.wikipedia.org/wiki/History_of_the_euro

You are correct that Germany needed to be "convinced" in the latter stages of the Union — they were having cold feet when it came time to give up the stable German Mark.

But, originally the Euro was conceived as a way to integrate Germany into Europe after WWI (a german politician, Gustav Stresemann, proposed a common European currency to the League of Nations in 1929). The idea was sold as a way to prevent Germany from becoming too powerful. However, we now know it would have the opposite effect.

With Weimar hyperinflation fresh in Germany's collective memory, many people believe that Germany actually wanted a common European currency so that Germany's powerful industry would be able to stay competitive without ever have to devalue its currency in order to compete with the many other small European countries (who would likely devalue their currencies to compete with Germany). No matter how you look at it, the Euro was always Germany's idea. But, you are correct that Germany had second thoughts when it came time to actually make the switch.

[stone]

Gumby, thanks for the link. So people are being somewhat unfair on Mundle when he gets the blame especially since he gave caveats of when a currency union would NOT work and basically all of them faced  the euro .

[Storm]

With Weimar hyperinflation fresh in Germany's collective memory, many people believe that Germany actually wanted a common European currency so that Germany's powerful industry would be able to stay competitive without ever have to devalue its currency in order to compete with the many other small European countries (who would likely devalue their currencies to compete with Germany). No matter how you look at it, the Euro was always Germany's idea. But, you are correct that Germany had second thoughts when it came time to actually make the switch.

Thanks for the background, Gumby.  As appealing as it would be for US manufacturing, do you think we might have similar problems if we ever decided to try to bring China onto the US Dollar system, or some other new monetary union?

[stone]

With Weimar hyperinflation fresh in Germany's collective memory, many people believe that Germany actually wanted a common European currency so that Germany's powerful industry would be able to stay competitive without ever have to devalue its currency in order to compete with the many other small European countries (who would likely devalue their currencies to compete with Germany). No matter how you look at it, the Euro was always Germany's idea. But, you are correct that Germany had second thoughts when it came time to actually make the switch.

Thanks for the background, Gumby.  As appealing as it would be for US manufacturing, do you think we might have similar problems if we ever decided to try to bring China onto the US Dollar system, or some other new monetary union?

I thought that the whole problem was that China unilateraly decided to peg themselves to the USD. The USA is complaining about that. "Deciding to bring China onto the US Dollar System" seems the exact opposit of what the USA is saying it wants. The USA says that they want China to float the Chinese currency so that it strengthens against the USD so as to reduce the trade imbalance. China is the net exporter that has a currency that is undervalued due to China's efforts to keep the RMB undervalued by pegging it to the USD.