MacroScope

Unleashing the forces of Hellas

February 26, 2010

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Greece is a country that has always punched above its weight. Its population, after all, is barely more than Chad’s. But it has rarely grabbed as much attention as now with a debt crisis that has gone as far as having some people predict the downfall of the whole house of euro.

With this in mind, MacroScope has noted two thoughtful new posts on Greece and the underlying issues facing the euro zone.

 First, Willliam De Vijlder, chief investment officer at Fortis Investments,  is taking an economist’s joy at all the various conflicts surrounding the issue — from worries about moral hazard (setting bad precedent for others with a bailout) to income transfers versus economic incentives (German retirement has been raised to 67, Greeks can head for the beach from 55).

De Viljder — whose truly European posts can be read in English, French or Dutch, by the way — is adamant, however, that the euro zone is not going to disintegrate:

Let’s be clear about this: the monetary union is not going to collapse, if only because the treaty which establishes the union says nothing about any country leaving it. It reminds me of the Eagles hit “Hotel California” from the 1970s:  “You can check out any time you like, but you can never leave”.

Basically, he reckons letting Greece implode is too frightful for others to contemplate:

A solution will be found (the alternative would be inconceivable, given its contagion on government bonds, corporate bonds, equity markets and the euro). The maturity calendar for Greek government bonds over the coming weeks is generating pressure…. The solution will have to be tenable, in short, with financial assistance balanced by commitments. And … the solution will have to be credible: that is, there has to be a “stick”, and it has to be visible.

Simon Tilford, chief economist at the Centre for European Reform, a think tank, also reckons the unravelling of the euro zone is unlikely. But he has a lot of blame to throw around for the problem — and not just at the euro zone weak southern underbelly.

Many eurozone governments do not seem to have understood the implications of membership. When they signed up to the euro they effectively committed themselves to liberal economic policies. There is no eurozone government to transfer funds from stronger to weaker member-states. So if a country loses competitiveness it has no option but to cut its costs relative to the rest of the currency bloc….  The governments of the southern member-states have shown no urgency to improve their dire productivity performance…. They have shown similarly little enthusiasm for reforming their highly regulated labour markets.

But let’s not let the big boys off the hook:

Neither the Germans nor the other countries running big surpluses are taking steps to rebalance their economies. In order to retain the confidence of lenders the eurozone’s hard-hit governments will make big cuts in public spending. In the absence of strong exports, this will depress demand and with it economic growth, in turn undermining the attempt to strengthen public finances. Germany will agree to support a member-state which finds itself unable to tap the bond markets, in order to prevent contagion to other struggling member-states. But it will resist pressure for economic union, as this would involve the “stronger” economies transferring money to the “weaker” ones on an ongoing basis.

Would that Chad had enough clout to cause such trouble.

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