There are three issues in today's European crisis. They should be
dealt with separately and independently, for they are different problems
amenable to different kinds of solutions. Instead, they are mashed
together. And that is the major reason that the crisis is intractable.
The first issue is that Northern European bankers and investors loaned Greek politicians money when the Greek politicians did not have a mandate to raise taxes to pay that money back. The bankers and investors were betting on rapid growth that would produce a sufficient fiscal dividend that Greek taxpayers would not notice. Failing that, they were betting on being bailed out by somebody. It was a risky growth-or-moral-hazard play. It has gone wrong. The bankers and investors cannot collect on the "growth" portion. If they want to collect on the "moral hazard" portion, they should apply to the ECB and the German government. This issue seems to me to have very little to do with Greece: it should be settled in Northern Europe.
The second issue is how Greece is going to balance its government expenditures and government revenues going forward, for nobody--or at least nobody sane--will lend the Greek government more money for a long time to come. This, it seems to me, is an issue for the Greek political system and the Greek political system alone: it should be settled by the Greeks.
The third issue is how is Greece as a country is--and the other countries of southern Europe that also received enormous capital inflows that pushed up their nominal wage and price levels are--going to balance its exports and imports going forward without suffering a decade-long depression. The Friedmanite monetarist solution would be to let the foreign exchange market do the job: abandon the euro, and let the drachma find the level at which imports balance exports. The alternative is structural adjustment--an increase in the level of nominal wages in euros in Northern Europe and increased efficiencies and stable nominal wages in euros in Greece and Italy and Spain and Portugal and Ireland. This structural adjustment strategy preserves the euro, but it calls for adjustment on both sides: structural reform in Greece, etc, and also higher inflation in Germany.
Read more: http://delong.typepad.com/sdj/2012/06/the-three-issues-of-the-greek-crisis.html
The first issue is that Northern European bankers and investors loaned Greek politicians money when the Greek politicians did not have a mandate to raise taxes to pay that money back. The bankers and investors were betting on rapid growth that would produce a sufficient fiscal dividend that Greek taxpayers would not notice. Failing that, they were betting on being bailed out by somebody. It was a risky growth-or-moral-hazard play. It has gone wrong. The bankers and investors cannot collect on the "growth" portion. If they want to collect on the "moral hazard" portion, they should apply to the ECB and the German government. This issue seems to me to have very little to do with Greece: it should be settled in Northern Europe.
The second issue is how Greece is going to balance its government expenditures and government revenues going forward, for nobody--or at least nobody sane--will lend the Greek government more money for a long time to come. This, it seems to me, is an issue for the Greek political system and the Greek political system alone: it should be settled by the Greeks.
The third issue is how is Greece as a country is--and the other countries of southern Europe that also received enormous capital inflows that pushed up their nominal wage and price levels are--going to balance its exports and imports going forward without suffering a decade-long depression. The Friedmanite monetarist solution would be to let the foreign exchange market do the job: abandon the euro, and let the drachma find the level at which imports balance exports. The alternative is structural adjustment--an increase in the level of nominal wages in euros in Northern Europe and increased efficiencies and stable nominal wages in euros in Greece and Italy and Spain and Portugal and Ireland. This structural adjustment strategy preserves the euro, but it calls for adjustment on both sides: structural reform in Greece, etc, and also higher inflation in Germany.
Read more: http://delong.typepad.com/sdj/2012/06/the-three-issues-of-the-greek-crisis.html
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