Comments on: Brit Euro Shock Horror: Part II Shining a light on the dismal science Wed, 16 Nov 2016 01:39:19 +0000 hourly 1 By: JWL Wed, 17 Mar 2010 11:49:28 +0000 Maybe the Brits do know something the others don’t.

1) The Greeks will sort it out themselves

No nation has contracted this much in history during a recession. In any case, is it sane? If Greece does it, the other PIGS will have to do it as well. ‘Social unrest’ won’t be an adequate description of what will follow in Southern Europe.

2) The European Union will bail Greece out

This is pretty much impossible. It’s against the rules and the Germans are radically opposed. Some window-dressing may be done but nothing substantive is possible. ‘Moral hazard’ arguments play very strong in Germany and other Northern states which would have to sign off on this.

3) Greece will default or restructure in an orderly manner and remain in the euro zone

Greece may yet go to the IMF even though the EU would see this as a black eye. This seems likely to be the nearest thing to ‘orderly restructuring’ that is possible. Again, though, social unrest [already under way] might well render IMF cures impossible to implement.

4) Greece will default in a disorderly manner and exit the euro zone

If you are only a bit pessimistic, you have to assume that things in Greece are going to get horrible over the next few months. Even if their government proposes cuts, it will prove impossible for the Greeks to contract their deficit [after all, their main industry of tourism is going to take a beating this year]. They will be unable to sell their bonds at any price. Social unrest will reach the point that the military takes over, again [will it be the generals, the colonels or the sergeant majors, this time?.

Many countries, like Greece, had political elites which thought that getting into the EU and then the Euro would consolidate the institutions which favour their own personal success and prosperity. For a decade they avoided paying the price for doing this [fiscal prudence]. The resulting blow-up was inevitable. Until now, the EU in Brussels has always managed to fudge round problems and increase its own power at the same time. The UK has always hated this, so from a UK perspective, reasonable optimism suggests that the EU, this time, is going to suffer a very big black eye.