Economist Nouriel Roubini believes that the Greek euro tragedy is nearing its final act and the country will exit the euro either this year or next year. He says that Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression and the all the solutions that might improve Greece’s competitiveness require devaluation. That option is not feasible given Germany’s intransigence and ECB’s non-cooperation. So he suggests:
[…] begin an orderly default and departure, co-ordinated and financed by the European Central Bank, the European Union, and the International Monetary Fund (the troika), that minimises collateral damage to Greece and the rest of the eurozone.
Professor Roubini also says that the process will be traumatic – and just for Greece. But he says that contagion will not spread.
Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial. Other peripheral countries already have Greek-style problems of debt sustainability and eroded competitiveness. Portugal, for example, may eventually have to restructure its debt and quit the euro. Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, without such liquidity support, a self-fulfilling run on Italian and Spanish public debt is likely.
IMF, on the other hand, believes that the global markets are more deeply interlinked than 2008, hence global contagion risks are greater.
Contagion or no contagion, Greece leaving the eurozone will be quit painful for all. Forecasters in UK believe that if Greece leaves the eurozone then it will be pretty bad for their country.
Then there others who say that all this effort to save the euro won’t solve the crisis anyway.
The vast imbalances in trade, and yawning gaps in competitiveness, between European states will continue to cause problems whether they share a single currency or not.
But is Brussels listening? Maybe not as CalculatedRisk noted, President of the European Council, Herman Van Rompuy, thinks that Europe is on the right track – more-or-less.
As far as Europe is concerned, my message is straightforward: we are determined to stay the course. We will pursue our comprehensive strategy to decrease deficit and debts, and to return to growth and job creation, based on structural reforms, investments and trade. The European Council will discuss a pro-active growth agenda on the dinner on May 23 and we will finalize it on the European Council on 28-29 of June. In that respect it should not be forgotten that in aggregate terms growth in the Euro area is positive and picking up, while our external balances with the rest of the global economy are in equilibrium.
Was it Keynes who said that in the aggregate we will all be dead – alright he didn’t – but he did say this in Essays in Persuasion, as Paul Krugman wrote in his blog:
Ultimately, and probably soon, there must be a readjustment of the balance of exports and imports. America must buy more and sell less. This is the only alternative to her making to Europe an annual present. Either American prices must rise faster than European (which will be the case if the Federal Reserve Board allows the gold influx to produce its natural consequences), or, failing this, the same result must be brought about by a further depreciation of the European exchanges, until Europe, by inability to buy, has reduced her purchases to articles of necessity.
Keynes was discussing post World War I Europe and America was part of the aggregate. Today, Germany is part of the aggregate in Europe and has a lot to do in keeping European growth positive – something that Van Rompuy is discounting.
