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Friday, April 29, 2011
consequences of defautls in Europe
Steve Waldman, a macroeconomist who falls into the new monetary theory school (with a smattering of Post-Keynesian) comments on a piece by Kindred Winecoff that is one of the clearest explanations of default vs inflation I have read recently. Winecoff begins with "The alternative to an internal devaluation through wage cuts, tax increases, and reduction of social services is external devaluation (exit from euro) and default. Call it the Iceland Alternative (Iceland was never in the euro, but it did devalue/default, which is what we’re talking about). In that scenario, the new drachma and Irish pound will collapse in value and the government will be unable to borrow from international capital markets. This is austerity too." Read the piece for more understanding of the trade-offs facing some of the European countries.
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Very interesting but very confusing article. To me it sounds like the trade off is lose lose here. If Greese exits the Euro and needs to issue its own currency their will be an immediate devaluation of that currency resulting in infated import prices.
ReplyDelete"Losing the capacity to run a current account deficit and losing the capacity to run a fiscal deficit have very different implications. Shifting international accounts from deficit to balance harms citizens in their role of consumers, but serves them in their roles as workers and savers. If you view the current crisis as driven by the challenge of maintaining consumers’ standard of living measured in tradable goods, then losing the ability to run current account deficits seems harsh. But if you view the crisis as driven by frustration within countries over insufficient opportunity and employment, then shifting to international balance or even to surplus helps. Losing the capacity to run a fiscal deficit has the opposite effect. Where current account austerity increases labor demand, fiscal austerity reduces it. So if you think that underemployment is the pressing problem in the Europeriphery, current account austerity plus continued fiscal deficit is a golden combination."
Greece has both these problems... They are projected to have an unemployement rate of 14.8% this year, and their citizans want to maintain the same standard of living. Not really sure what they can do.
I think that is the problem: there is no win/lose trade off model. If there were, I don't think Greece's struggles would be so dire.
ReplyDeleteI was in Greece last summer and I had a conversation with a guy in Athens. He was telling me that what really needs to change in Greece is the mindsets of the people. He was telling me that people only work something like 5 hours per day and they take nearly a third of the year off on vacation to the islands or whatnot.
His idea was that the government caused this problem. For years people in Greece have been getting ridiculous benefits from the government and over time they have started to feel like these benefits are a right.
I think the Greece government needs to cut the citizens off. Undoubtedly, unemployment will increase and people will be mad, but in the long run I think it's the best option.
Yeah it is always difficult to get tough cuts passed like that when it seems so politically unpopular. But you guys are right something has to give.
ReplyDeletePortugal, Spain, Ireland, Italy, and Greece's future will play a major role in the US. Personally, I don't think the European currency is going to disappear. As we said in class, one option is to kick Greece out of the European Union and bring them back in after rehab (as we do with celebrities in the US) at a lower exchange rate with an independently audited set of books. Regardless of the situation, the work force in Greece needs to adopt a major culture change from their short work week and lackadaisical attitude.
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