Greece needs to leave the euro: Part II

My response to a great article by Martin Wolf in the FT on 6/16/2015 which you can read here.

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Excellent article by Martin Wolf, but not really too revealing on what the options might be. 

Governments are responsible to their voters, not to the holders of the country's national debt.  When you look at that chart of real domestic demand at around 68 percent of where it was in 2008, you also understand that the Greek government needs to stick to it's guns this time. 

The sad thing is that these negotiations have not allowed any latitude for new measures, such as perhaps the conversion of some of the existing debt to consols, or the future sale of some Greek assets (Mykonos?) - they have almost exclusively focused on extracting further austerity measures from the Greek negotiators.

Given the lack of any imaginative initiatives on the part of the negoatiators, the unsuitability of Greece for belonging to the euro area (due to it not satisfying the optimal currency area critieria), as well as it not properly fulfilling the Maastricht criteria for joining the euro in the first place, the Greek government now needs to plan it's exit from the euro.

Despite Mr. Wolf's concerns about Grexit, I really don't think these specific circumstances apply to any other euro area member states, so the prospect of any contagion is minimal..

The really sad thing is that this whole Grexit thng has been kicked so far down the road as far as it has. The can is looking pretty crushed and deformed now, having been kicked so much - so now is the time to take the can off the road and put it in the garbage, or recycle it! 

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.