MacroScope

Unleashing the forces of Hellas

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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”.

On leaving the euro zone

The strains on various outlying European economies have triggered talk about a break up of the euro zone (usually swiftly followed by denials that any such thing could happen). Now comes an interesting report from the London-based Centre for European Reform, looking at what would happen practically if a country were to leave the currency union. For an insight, the think tank turned to Jan Mathes, a former Slovak National Bank board member who was around when Czechoslovakia split.

As most euro zone countries don’t have a stock of national currencies in reserve, a leaver would have to create one, he says. But this takes ages. Coins alone require months and bank notes these days have to be high-tech to be secure. A leaving country could still use euros for a while but with a national stamp on (as happened with the old Czechoslovak crown). But it would be easy to remove a stamp and the underlying currency would be a euro — too tempting.

The biggest problem, or course, would be in keeping a new currency above water, which would be difficult because it was leaving the euro zone because of bad fundamentals in the first place. So IMF-style reforms would be needed. “But the same reforms, if introduced early, would also reduce the chances of a country dropping out of the euro in the first place,” Tomas Valasek, author of the CER note, writes.

Not gloomy enough

The European Commission has been pretty gloomy about the prospects for European Union economies in recent days. Its latest forecast last week was for the 15 countries of the euro zone to grow by just 0.1 percent next year. For the 27-nation EU as a whole – this time incorporating the likes of Britain, Poland and Sweden – the number was only slightly better at 0.2 percent.  In fact, the Commission said the outlook was bleak. “The horizon,” said Monetary Affairs Commissioner Joaquin Almunia, “is dark.”

Simon Tilford, chief economist at the Centre for European Reform, reckons it may be even darker than the Commission expects. The Commission, he says in an article, has a tendency to be slow to downgrade its forecasts, and much of what it said last week was already looking out of date when released. “The indications of an unprecedented slump in economic activity are multiplying all the time.”

Tilford reckons the forecasts for Germany and Spain — the euro zone’s first and fourth largest economies, respectively – are among the most out of sync. Germany, for example, is seen standing still. But Tilford asks where such strength as even that will come from given the economy’s reliance on exports and a projected dive in global trade volumes. As for Spain, he wonders how a decline in output can be held to the Commission’s minus 0.2 percent with unemployment rising rapidly, industrial production tanking and construction and housing activity collapsing.