Tuesday, January 20, 2009

Eurozone Tensions

Let me, following Barry Eichengreen, restate the question of the euro posed in a previous post in a way that left Bernard "bored." Yes, indeed, the cost of exiting the Eurozone would be prohibitive for a country like Greece. Nevertheless, there is also a very large cost for having opted into the system. Eichengreen reasons in terms of a symmetric economic shock and an asymmetric financial shock. Indeed, faced with a sharp reduction in growth ahead, capital is fleeing for safety. In the United States, that means buying short-term Treasury bonds: real interest rates on 3-month T-bills are now negative. In Europe, the flight to quality means abandoning the sovereign debt of countries perceived to have structural deficit problems or serious housing bubbles. The consequences will be harsh: austerity budgets, wage reductions, transfer payments (bailouts)--and then social unrest. How much longer before the troubling political consequences begin to manifest themselves? In Greece, perhaps we have already seen the beginning with the recent riots, which, far from a fait divers, may prove to have inaugurated a year (or years) of discontent. Will that galvanize the ECB at last to take the final step with the Fed?

If Bernard is still bored, I recommend this.


Leo said...

Here is the FT's Munchau take on this which Bernard will not find boring.


Unknown said...

Hey, I was bored by the journalist cum so-called economist that you quoted, not by what you wrote. I've saved the optimal policy modeling paper (looks interesting), and will read it at some point.

The thing is, I am presently touring West African countries on a Europe-funded mission. I can report that people here were simply mesmerized by the inauguration yesterday, which I missed (I pretend to actually work at the moment).

Unknown said...

My son was there in person, on the Mall, and he said everyone was mesmerized. But for him the most moving thing was the scene on the highway up from Memphis (where he'd gone for MLK Day and a tour of the Stax Museum--like father, like son): at every rest stop there were carloads of elderly blacks dressed in their Sunday best, on a pilgrimage to the capital to bear witness to the unbelievable event.