Greece has the potential to be the small domino that ends up toppling much larger dominoes.
....
Here is a preliminary semi-random list of thoughts on Greece's exit from the euro.
1. I make no claim to expertise in this matter--but I don't think there are any experts in this, as there is no real analog in recent history.
2. This lack of analog (a nation with a small population and
GDP leaving or being ejected from a much larger currency union)
undermines all references to historical examples.
3. No offense intended to the hardworking people of Greece,
but the population and GDP (gross domestic product) of Greece is quite
small. Greece's population is 11 million and its GDP is about $240
billion. The modest scale of Greece also undermines any analysis or
projection based on historic precedents involving much larger economies.
The European Union has over 500 million residents. Greece's population represents 2.2% of the EU populace.
Ecuador, which uses the US dollar as its currency, has 15 million people.
Los Angeles County, with slightly more than 10 million residents, has a GDP of $554 billion, more than double that of Greece.
4. A sovereign currency reflects not just the interest rate paid on its bonds, but on a host of other factors:
fiscal and trade deficits/surpluses, currency pegs, national income,
the vibrancy and resilience of the economy, the ability of the central
state to manage the economy, private bank credit, transparency, costs of
corruption, ease of doing business, how foreign investment capital is
treated, the skill levels of its workforce and so on.
5. Thus the Grexit discussion of currencies leads directly to
all the larger questions of the Greek economy, political order and
society.
In other words, Greece faces not just a debt and
currency crisis, but a systemic crisis of its social and political
order, its machinery of governance, the legitimacy of its system of
taxation and the flexibility of its economy. The currency and debt
crises are reflections of these much deeper crises.
These include:
-- Does the structure of Greece's government lend itself to fragile coalitions that are incapable of implementing tough reforms?
-- The need to modernize the practical machinery of
governance: record-keeping, taxation policies, transparency, processing
of permits and other regulatory necessities, etc.
-- Does the central state have the wherewithal to effectively
remake the culture to eliminate corruption as the default setting in
the economy?
6. All other things being equal, a nation with a weak but
stable currency that makes all imports costly to its residents invites
investment in producing more goods and services locally. The keys to
being attractive to long-term investment of foreign capital are:
-- A stable currency
-- A central state that isn't going to nationalize the investment the next election cycle
-- A stable, transparent regulatory and permit system
-- A stable, transparent system of taxation
-- A central state that isn't going to nationalize the investment the next election cycle
-- A stable, transparent regulatory and permit system
-- A stable, transparent system of taxation
7. Some readers suggested Greece could peg a new drachma
currency to the U.S. dollar as a means of establishing much-needed
stability. The key to any peg's sustainability is setting the peg low
enough that the market won't force the central bank to defend the peg,
which is what triggered the Asian Contagion Crisis of the late 1990s.
The nation establishing the peg must also avoid
overborrowing, in essence free-riding the stability established by the
peg, which is what brought down Argentina's dollar peg in the early
2000s.
8. The Greek people have a simple choice: "do whatever it
takes" to stay in the euro, which means living with austerity for
decades to come, or leave the euro. It's that simple. The majority of
Greeks supposedly want to stay in the euro, but they must come to grips
with the reality that the euro is a plutonium life preserver. It's
one or the other: permanent austerity as the cost of keeping the euro or
no austerity and no euro. You can't have it both ways.
EU Leaders Throw Europe a Plutonium Life Preserver (October 27, 2011)
9. Though the mainstream financial media is running a
full-court propaganda campaign promoting the idea that "Greece doesn't
matter any more," the much-feared reality is that Greece has the
potential to be the small domino that ends up toppling much larger
dominoes:
Domino Chain Reaction (1:10 YouTube video)
Of related interest:
Although the financial media is blathering about
negotiations and gamesmanship, the truth is Greece just blew up the
Empire's Death Star of debt. There's nothing left to negotiate except
the official admission that the Imperial Death Star of debt, the most
fearsome threat in the galaxy, has been blown to smithereens.
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