Friday, May 18, 2012

All this talk about Grexit!

I am surprised how common it has become to talk about “Greece leaving the EZ” or “Greece being kicked out of the EZ” or even “Germany leaving the EZ”. As far as I know, it is legally impossible for any country to leave the EZ, much less being kicked out of it. The procedure is that a country would first have to leave (or be kicked out of) the EU and subsequently it would be out of the EZ. And then it would have to re-apply for EU-membership, if it wanted that. I would imagine that a country could probably leave the EU anytime it wants to but to kick a country out of the EU would definitely require a process, a process which will definitely take longer than 24 hours.

Suppose Greece repudiates all its debt and Greece is cut off from all new funding (including funding from the ECB). That would not mean that Greece would have to leave the EZ (among others because it couldn’t; see above). It just would mean that Greece would be a bankrupt country in the EU and probably could not pay salaries or pensions. It is not illegal within the EU to go bankrupt.

To not be able to pay salaries or pensions is, of course, a nightmare for any government but it is not a reason to lose one’s nerves right away. First, a government can delay a lot of other payments before it has to delay the payment of salaries or pensions. Also, the Greek government could pay salaries or pensions with post-dated checks and thereby create something like a secondary market for Euros. And so forth. There are no limits to creativity when one is out of cash.

The most important aspect, in my opinion, is that the EU could probably not get away with just sitting-by and watching how a member country can’t pay salaries or pensions. If one were to bet that the EU would blink first, I would consider that as a good bet.

None of that, of course, is a solution for the longer term. The solution for the longer term, in my opinion, can only be something which incentivates the economy to create new jobs; new jobs whose holders can afford a decent living while still paying tolerable income taxes; where the employers can pay tolerable corporate taxes and the owners can pay tolerable taxes on dividends. Some believe that austerity, austerity and austerity will achieve this. I would suggest that reforms, reforms and reforms will achieve that (and with reforms, austerity makes sense).

1 comment:

  1. I agree with your analysis, Herr Kastner. There is a lot of speculation right now, do remember that it sells newspapers!

    The real worry here is the EU itself, which has never shown itself a good policeman. Were it so, Greece would not have been allowed to get into trouble in the first place. The EU will muddle through somehow, the press will continue to scream "Germany!!" and Greece will continue to suffer.

    This lack of ability - not unknown amongst bureaucrats - is accompanied by their lack of vision and lack of imagination. Both are essential if Greece is to get people working again. After all, it was the lack of insight by the EU bureaucrats that let Greece in in the first place because the figures they were given "looked okay". There was nothing to tell them that the facts had been manipulated. There was no headed notepaper from Goldman Sachs stating that a fraud had been perpetrated.

    A bureaucrat looks no further than the piece of paper they hold in their hands. After all, those are the figures, the facts. How do you deal with things that aren't facts? They can't. Try explaining about imagination and you will run up against a brick wall of thinking pretty quickly in my estimation.

    It is all part and parcel of the problem: they need facts to deal with a problem. The problem is that the facts only happen after the problem has happened. A bureaucrat has no weapons to deal with the oncoming crisis. Their response will be that it was impossible to deal with. They did not see the warning signs because they were not written down on paper: warning signs rarely are.

    That many people are losing their livelihoods means nothing to them. After all, that is another department's job. It only matters to them when they find their own job is lost. They did not look for a job because they did not need to. When they come to look for a new job they will quickly discover that there aren't any being advertised for their position. That is when they realize that their unemployment cheque is post dated. That is when their electricity is switched off and there is no money to buy food anyway.

    Just because it is not their fault does not mean that it does not hurt.