Lots of talk in the financial markets about a possible exit from the Euro. Some quick observations on this possibility and the chatter associating it:
- A care-taker government organising a Euro exit against the wishes of most political parties? If the Greek politicians could organise that kind of deception they wouldn’t be in such trouble. Hence no way that any exit is imminent. It would need an elected government with a clear mandate to do it and that is many months away at least.
- There are many wild stories about the intricacies of an exit that deflate as soon as you think them through. The notion that Greece would ‘stamp’ the Greek Euros in circulation and that Greeks would voluntary let their Euros be stamped is a good example. Think about this one: if the Greek-printed Euros would be worth half in Greece as outside of Greece (in other countries all central banks still have the duty to treat them as legal tender) then which Greek in their right mind is going to let their Euros be stamped? All liquidity would disappear immediately upon announcement. And, given Greek’s clientelist political system, there will be leaks. Hence the Greeks would have to introduce a new currency which takes a bit of preparation.
- The underlying reason for talk of a Greek exit is fascinating from an economic theory point of view: what has to happen is that all Greek prices should go down by some 50%. In a true flexible-price system this should happen overnight, right now. However, to politically organise that 50% reduction in anything connected with the state (welfare benefits, wages, pensions, etc.) would probably lead to a situation resembling civil war whilst no such thing would happen in a normal devaluation. A textbook case of nominal price rigidities. Re-introduction of a whole currency as solution to the coordination problem of price reductions and the loss of face of being seen to acquiesce in price reductions. Fascinating stuff on which no clear political economy model yet exists.
My money is still on a Greek default without exit from the Euro. Default is probably not too far off. What it mainly needs is for the Germans to realise they are tearing the Union apart by their futile attempts to bail out countries in free-fall. It leads to extreme ingratitude.