Greece needs to leave the euro: Part III

The is my comment in the FT to an article by Larry Summers on Greece which you can read here published on June 20th, 2015.

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Interesting article, but in my humble opinion pure hyperbole from Larry Summers.

Greece needs to leave the euro, and for reasons I have elucidated elsewhere ( - see my article here - http://www.patrickmcrowley.com/A_Note_on_How_To_Resolve_the_Euro_Area_Crisis_12-13.pdf - from the Europe Institute Journal of University of Auckland, NZ). But this needn't have the serious financial fallout that Summers refers to if handled properly, and for the following reasons:

i) We are not in the situation that we were in in 2010 - the other PIIGS member states are in much better shape, and although there will be concurrent rise in perceived default risk, the actual risks are all well contained, for the simple reason that the other economies are all now in expansion mode (or in the case of Italy, at least not in contraction mode). 

ii) This is not a situation that wasn't predicted by some pundits (including me), so plenty of preparations have been made for the fallout once Greece imposes capital controls, does an Argentianian freezing of all bank accounts, converts to a new (or legacy) currency and then sees a precipitous depreciation in the new currency.

iii) The Syriza government originally ran for election to government on getting out of the euro if austerity continued, so they will have fulfilled their mandate to the people of Greece, and although the pain will be sharp and incisive once the new currency depreciates, then the stage is set with a much more competitive economy, for economic growth.

Summers seems to wallow in some idealistic "coming together" of the two sides to avert crisis, but marriages do not necessarily always dissolve in crisis and likewise, this needs to be resolved in the best way possible for all parties concerned.  The Greeks need to leave the euro, the IMF needs to re-denominate the debt in SDRs and modify the conditions for repayment, and the Europeans need to take a haircut to give the Greeks the best chances of recovery, preferably with a payback trigger that is conditional on economic growth.

What Summers fails to mention as the downside is that the consequences for the impetus for European integration are much more serious.  The euro was meant to be a further step forward in the "ever-deepening" economic and political integration of the European Union.  It was never envisaged that a member of the single currency should leave, so Greece's departure portends a complete re-think on the role of the euro in the framework for European integration.  It points to the embedding of a two or even three speed Europe, which makes it much harder for political enthusiasts of integration to cook up (even in the longer term) further grand integration initiatives. 

I think that that European politicians and civil servants need to understand that just because something is labeled "European" doesn't mean that it is necessarily going to be the best option for all European Union member states. 

Greece needs to leave the euro: Part I

I wrote this comment in reply to a great article published by Martin Wolf in the FT today (6/3/2015) which you can find here 

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Good article, but in my humble opinion some misconceptions.  

First, Martin Wolf makes the point that the euro area is not an OCA.  As my research has clearly shown (see my Bank of Finland discussion paper on this issue published 2 years ago  http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Pages/dp2013_33.aspx), Greece does not have, and never did have, business cycles (or any other cycles for that matter) that are synchronous with the rest of the euro area.  It is simply not a good fit with the rest of the euro area, without (according to the OCA theory) there being sizable offsets which consist of fiscal transfers and much higher labor mobility.  And this is the case both ex-ante, and ex-post.  So, given this empirically proven stylized fact:

Second, the Greek government is simply wasting it's time and energy negotiating something that will not result in any long term membership of the euro - it will just be "another shot of medicine to help the dying patient".  I understand that the fact that the Greek government is actually negotiating is a necessary political pre-requisite to leaving the euro, but let's not drag this sorry Greek tragedy on any further than needs be, as this just prolongs and likely exacerbates the suffering of the Greek people.  

Third, Martin Wolf says that this will have a profound effect on the euro area and reverse the integration dynamic.  Well, hmmm, Greece is a little country the size of the State of Rhode Island in the context of the US - so it's not as if Spain or Italy were leaving. The euro area is 16 years old - and so its longevity won't depend on one small member deciding to leave early on it's evolution.  Also, the UK leaving the EU would have a much bigger impact on the integration dynamic than Greece leaving the euro area. 

Lastly, Wolf clearly wants Greece to stay inside the euro when he says that "This must be seen as a long game".  I mean how long do you want this game to be?  Governments simply don't think long term as their time horizons are short term or medium term at best. So the Syriza government really has the choice of alienating it's supporters and signing up to something that it promised never to sign up to, or pulling Greece out of the euro, which will create some chaos to begin with unless they have a proper plan B in place.  

If I were the Greek finance minister right now (which thankfully I am not), I would be furiously planning and comparing different strategies for a euro exit, as inevitably, that's what is the most likely outcome here.  

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Now in part 2 of this blog, which will come out in the next couple of days, I will outline what I think the options are for Grexit.