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Home > Blogs > Anthony Harrington > Greek tragedy harrows the euro

Greek tragedy harrows the euro

Finance Blogger: Anthony Harrington Anthony Harrington

In his blog for Telegraph.co.uk, Edmund Conway argues that perhaps the biggest flaw in the European Monetary Union was always going to be the absence of any central European economic government with fiscal powers. There are generally three routes available to a sovereign state when it finds itself with an insupportable deficit, he points out. It can:


  1. draw up and implement a sensible austerity plan to cut the deficit,
  2. depreciate the currency to inflate the debt away, and
  3. cry for help to the IMF.

None of these are available in the case of Greece, which now looks as if it will be unable to meet the interest on its burgeoning debt for very much longer. Nor are these measures available to the other basket cases in euroland, notably Italy, Spain, Portugal, and Belgium. Why not? Let us start with the second option. Clearly none of the individual members of the eurozone have their hands on the levers required to print euros in quantities. That is the prerogative of the European Central Bank, and though ECB President Jean-Claude Trichet was at the recent meeting of EU leaders which considered bailing out Greece, you can bet he wasn’t volunteering to depreciate the euro to save the eurozone’s reprobates from the consequences of their gigantic spending binge.

Which leaves options 1 and 3. Greece is already well down the road with option 1 but it seems likely, despite the optimism of the Nobel laureate economist Professor Joseph Stiglitz whom the Greeks have hired to advise them in their pickle, that the country will run out of cash long before its austerity measures can save it. Professor Stiglitz has considered the matter and now tells anyone who will listen that if the EU would only burn off the speculators shorting Greek sovereign debt, and guarantee Greece’s debts in principle, the country would have plenty of time to pull itself out of its mess through its own efforts, and it wouldn’t cost European taxpayers a euro. What’s wrong with this? Well, if you guarantee a debt in principle, the funny thing about it is, if the debtor bombs, you pay. But Professor Stiglitz says it’s alright—yeah, right, Joe… So we’re all talking about Greece because…?

Option 3 is definitely out the question for at least two reasons. One, the EU won’t wear it because it would imply that the EU itself was powerless, which would not do very much for the euro’s pretensions to be a rival to the dollar as an alternative global reserve currency. Two, the IMF is seen as a zone of US influence, being headquartered in Washington, and inviting the IMF in would, for some European politicians, be as welcome as inviting President Obama to stand for European President. There is also the niggling thought being voiced on the internet that President Sarkozy of France might not want to have Dominique Strauss-Kahn, a major figure in the French socialist party and boss of the IMF, turn up as the savior of the euro, even if President Sarkozy put him up for the IMF role in the first place.

Where does all this leave Greece and the eurozone? In parlous straits, it seems.

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Tags: central banks , EU , global imbalances , Greece , IMF , sovereign debt
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