Grexit? what about the PICS?
Grexit – Greece exit of the Euro
PICS – Portugal, Ireland, Cyprus and Spain.
Lets face it, the Eurozone is in a chaotic mess.
Angela Merkel is getting it in the neck at home of the continual and almost open-ended support she is committing the German taxpayer to. The cost of the bailouts, rescue packages, transitional stability funds and the many other ways in which the Germans are putting their hand in their pockets is costing Frau Merkel a huge amount of political capital. Not to mention the IMF contributions (at least usually that money makes its way back eventually).
I was reading an article in the economist whilst on holiday about the options for the German chancellor and it set me thinking about the problems that the ‘keep Greece in at all costs’ was causing. The impossibility of leaving the Euro or being kicked out has been built-in with the treaties that put the Euro in place. This itself is the political straightjacket that is impeding a solution.
The disorderly collapse of the Euro would be a massive disaster for all of the world economies and that is why a long, hard look at the Euro needs to be taken.
Why isn’t it working?
The eurozone is composed of 17 countries whose economies are not the same. Some are strong industrial economies and some are agrarian, some are mature and developed and some are developing. The EU (all 27) generates a stable market place to facilitate trade and allow free movement of labour and capital (2 mobile factors of production). The single market allows each nation to maximise their comparative advantages and grow their economies while trading in a conducive environment.
The Eurozone as a subset is a problem. The richer northern european industrial economies are benefitting at the expense of the less competitive economies of the south. But this has been a slow building problem which has come to a head as the Global financial crisis continues to remain unresolved effectively. The sticking plasters are not going to cut it.
Spain et al, are hurting and the medicine is only going to kill the patient.
If the Eurozone expel or allow Greece (and others) to exit then the fallout will be horrendous as capital flight becomes a tsunami as investors run before any devaluation of their assets can take place. Any notion of a secret, planned introduction of a new currency that could occur over a weekend are utter fantasy.
Austerity isn’t going to help any of the weakest economies because they cannot regain any competitiveness while domestic demand is collapsing due to falling living standards and spiralling unemployment. There are only so many reductions in costs that can be achieved.
So, we can’t keep pumping in bailout money, we can’t allow Greece to run for it and escape its debts (or the rest will leg it too, if Greece doesn’t have to pay why would others?), we don’t fancy the cost of exits or collapses (the numbers are getting into trillions). Basically the political project, the Euro, is Fecked (well it is if there is no fiscal convergence)
Or is it?
What if a different monetary union was set up for the southern economies? After all, in the EU we have another distinct currency union that is working effectively with similar economies, I am talking about the Sterling zone.
Would a southern Euro work better than a chaotic mess of Euro failed countries with weak currencies? The benefits are there for all to see. They are similar economies who traditionally trade with each other anyway. They are all struggling to cope with competitiveness with more efficient Eurozone economies. It would stem the flow of northern european imports to these economies and stimulate domestic demand (as the imported goods would be more expensive). It would generate some flexibility to stimulate the smaller groups economies.
In short an Exit of a chunk that could be controlled and managed without killing the patients.
At the moment we are facing the disorderly exit / expulsion of Greece and the PICS or a semi-permanent transfer of cash to prop them up indefinitely.
So better to plan now and act sooner rather than later.
Think of it not as expulsion or exit but relegation from the Premier League to the championship ( and the Eurozone can make some parachute payments in the meantime.)
It’ll hurt like hell but it might be the way forward.