Sunday, May 6, 2012

Greek Political Solution Unravels

Today's election in Greece seems to have created a majority for those opposing the austerity measures agreed to by Greek politicians in exchange for the bailout by the European Union.  Now what?

The real tragedy here is that if Greece abandons the austerity program, which frankly they should do, then they will be booted out of the Eurozone and forced back onto their own currency.  Some economists think this is great.  Now, Paul Krugman would say, Greece can simply deflate the heck out of their currency and prosperity will be just around the corner.  That, of course, is ridiculous.

The best solution would have been for Greece to do a structured bankruptcy while remaining in the Eurozone.  The Eurozone is a good thing not a bad thing.  The US has benefitted greatly from being a single currency union and the same beneficial effects have flowed to Europe.  Remaining in the Eurozone should be a completely separate issue from the question of dealing with Greek sovereign debt.  There is simply no reason that those issues seem to be joined at the hip by commentators and some economists.

Again the current fiscal problems in Illinois are a perfect analogy.  If Illinois does a structured bankruptcy (and it will be forced into some kind of bankruptcy unless Congress bails Illinois out), there would be no reason to create an Illinois currency and proceed down the road of deflation.  That would be absurd.  So, it is with Greece.

Had Greece done a structured bankruptcy refinancing two years ago, we wouldn't be where we are now.  But, we are where we are.  Difficult times lie ahead in the Eurozone.

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