Tuesday, September 6, 2011

The solution to the EU-Greek tragedy

I mean this tongue in cheek of course, but this morning there was a great series of articles outlining the different "views" on the greek/EU situation. It helps me crystalize my thoughts on the issue.

The three articles are here, here and here.

The money quote is from Wolfgang Schauble, federal finance minister of germancy.

The eurozone crisis unfolded after a decade during which economies with markedly different and, indeed, diverging fiscal profiles and competitiveness were all able to borrow at close to benchmark rates
Translation: the greeks are

1/ a bunch of tax evadors
2/ a bunch of lazy asses

at least according to the minister of finance, which to the diligent german means "no way jose" should they spend their hard earned euros saving these people. That is the hardline "fiscal" view, which is strong politics in germany and who can blame them.

The counterpoint to that is that not saving the greek is cutting your nose to spite your face. 1/ The EU is the biggest market for germany, a depression in EU will hurt germany 2/ the banking system is so exposed to greece that there is a negative spiral of government - bank.

This is mostly discussed in the 'save greece' article, which I suspect is a proxy for Ms Lagarde's view from IMF (ex french finance minister) who basically says that the EU should use the EFSF to recapitalize the banking system. And break the cycle of bank-sovereign spiral.

Personally I come out in a slightly different place. QE playing a central part, I see the play being

1/ kick greece out of the EU. I do relate to the fiscal points, the german WILL not accept the sacrifice for people that openly do NOT pay their taxes. That is just politically impossible even if it is economically dangerous.

2/ use the ESFS to recap banks that were exposed to the greek mess.

3/ USE QE TO BOOST EFSF. If there ever was a good use to QE this would be it.

4/ harmonize fiscal behavior. The greek example should chill spain and Italy and france.

For all the bad rep a QE program gets, it is the only way if you rule out fiscal solutions, which in this case are just too unpalatable. Modern monetary frameworks do have their advantages.

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