2 thoughts on “Why doesn’t Greece simply default?”

  1. Posted 28/06/2011 at 12:45 | Permalink

    This is a very important point not made frequently enough – indeed, I am not sure of anybody else making this point consistently. There are many possible end games to the problem we have. One is for Greece to exit the euro and introduce its own currency (whether a sound currency or not), but let’s assume for the moment that the Greeks stay in the euro. It is difficult to imagine that this can happen under current monetary arrangements without complete fiscal centralisation because of the way in which the ECB conducts monetary operations. However, I think it is possible, in principle, to have a single currency without centralisation but it would then be necessary for the ECB not to accept bonds of all countries in repo arrangements (indeed it could conduct its monetary policy in an entirely different way). My own parallel currency suggestion would require changes in the way in which the ECB conducts its monetary operations, but it seems to me that these are easier to achieve than a complete unwinding of the euro and is certainly more desirable than fiscal centralisation.

  2. Posted 02/07/2011 at 09:24 | Permalink

    You’re right to emphasise the political agenda of the Euro, the economic justifications behind many periphery countries joining the Euro of convergence were very suspect. The political ties are both the reason they got into the Euro and why they will probably remain in the Euro. The negative shock that could spread through Europe if they defaulted, coupled with the fact that under current rules you can’t just leave the Euro, you must also leave the EU; means they risk becoming a political outcast with a currency no one would dare touch. Great for exports and debt relief for sure if they were able to form a new currency but inflation could then become a huge problem not to mention the sheer logistics and time needed to re-introduce the currency. Barry Eichengreen wrote an interesting short piece on this issue ‘stress test for the Euro’ in 2009 highlighting why exit is very unlikely.

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