Thinking the Unthinkable

This post was written by John McHale

Even as Greece appears willing to accept a larger austerity package in return for a much-expanded financing package, some leading economists are contemplating radical alternatives.  

Paul Krugman no longer sees a euro exit as impossible (NYT article here):

So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.

Nouriel Roubini  and Arnab Das argue in the Financial Times for a Plan B that involves a pre-emptive debt restructuring:

Continuing on the path of least resistance – a “Plan A” of official financing banking on a mix of deep fiscal cuts, inadequate structural reforms and hopes that markets will stay open, with growth doing much of the heavy lifting – is a risky bet that is very likely to fail. Already this week, financial markets and credit rating agencies have voted against this approach and started to price in a high probability that Greece will need to restructure its public debt coercively, with contagion to the rest of the eurozone periphery now a serious risk. Augmenting the programme for Greece alone – up to €100-€120bn as suggested by the IMF – will not work either.

Far better to move to Plan B. This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the eurozone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe’s economic and monetary union.

79 Responses to “Thinking the Unthinkable”

  1. colm mccarthy Says:

    Krugman is silent on the mechanics of a Euro break-up. How would Greece, for example, move to a New Drachma capable of being devalued against the Euro? It would have to be widely held, at least in Greece, for the exercise to be worthwhile. This means the introduction of a new currency (Greece does not have a currency to devalue) in the most unfavourable circumstances imaginable, including the well-signalled intention to devalue. Temporary inconvertibility (Krugman mentions restrictions on bank withdrawals) runs up against the Iron Law of Exchange Controls (’ controls always work except when you need them…’).

    Or think about it in reverse: Montenegro has chosen not to establish a currency and uses the Euro. How do you expel Montenegro from the Euro?

    The problem is that the Eurozone is not a fixed-exchange rate arrangement, it is a common currency, and any attempt by its weakest members (or external adherents) to establish a new national currency would run straight up against dollarisation.

    Default, aka rescheduling, is at least do-able. Euro exit, except for the strongest countries, looks to me as if it cannot be executed with sufficient adoption of the new currency to make any difference.

  2. Kevin O'Rourke Says:

    Colm: I think that PK is saying that if there is a complete financial collapse in Greece anyway (and I guess a state default is likely to lead to a banking collapse also, as the state guarantee to banks becomes worthless) then the opportunity cost of leaving is greatly diminished; i.e. leaving the Euro implies Armageddon which is why you’d be mad to embark on it, but if Armageddon happens anyway then the cost benefit calculus changes (I bet you in such a scenario the Greeks impose some sort of exchange control anyway, irrespective of its illegality).

  3. 2Pack Says:

    I cannot see a clean exit mechanism anywhere.

    The Roubini “Plan B” is interesting, it reads like letting the IMF prepare a menu of options on the lines of bad least bad best etc. Then the IMF presents the menu to all sovereign debtholders during the 3 year period when the debt is off market …but being serviced in full.

    That is an interesting precedent for the IMF/ECB if it is adopted. Normally they leave these matters to the secondary markets .

  4. Nico Says:

    Agree with Kevin O’Rourke.

    In any event, can any country affected, including our own, really sell a recovery programme that more or less guarantees double digit unemployment, falling wages, lower government spending and general misery for a decade or more. Not much of a prize for avoiding the break up of EMU is it?

  5. yoganmahew Says:

    The PTB (Powers That Be) seem to be of the opinion that it matters that a eurozone country has the formal apparatus to go with the use of the currency. Montenegro, as you point out, has decided it is not. So, apart from offerring Central Bank repo/liquidity operations/reserves/whatever else an NCB does these days, what does formal membership of a currency provide that informal does not?

    FWIW, I agree with you that no matter the state of collapse of the banks and the public finances, changing currencies is no trivial matter. In think this is compounded by the problem of the weak leaving the strong - the normal phoenix currency rises from the ashes of the old collapsed one. What Mr. Krugman seems to be proposing is to create a currency of ashes from an existing phoenix - I don’t see “old lamps for new” being a particularly popular or effective rallying cry.

  6. AL Says:

    printing money wont solve the problem!!

  7. Brian Lucey Says:

    Perhaps a better title would be “thinking the undoable and the unpalatable”.
    I wonder at times if David McWilliams and Paul Krugman are the same person ONLY on their euro-breakup obsession. At the risk of sounding like a prominent financial blogger when he shuts down the discussion of house prices “this has been discussed extensively elsewhere”.
    Exchange controls are great for physical money. An electronic bank run takes seconds, minutes maybe. And, without being insulting to our hellenic friends, given their admitted inability to control their taxation regime, what odds on a successful exchange control system?
    Plan B is unpalatable but doable – sov bond defaults/reworks are well trodden areas. Its also very arguable that defaulting by Greece (Oklahoma) implies a breakup of the euro (dollar)

  8. Kevin Donoghue Says:

    “How would Greece, for example, move to a New Drachma capable of being devalued against the Euro? It would have to be widely held, at least in Greece, for the exercise to be worthwhile.”

    If Greece annnounces that all principal and interest payments on outstanding government debt will be made in New Drachma, then there are substantial holdings of New Drachma by default (quite literally). What can the debt-holders do? There’s not much point in suing the Greek government in a Greek court.

  9. Brian O' Hanlon Says:

    @ All,

    I do respect the views expressed by the Irish Economy blog on the Euro zone issue over the past couple of months. I don’t believe anyone could accuse Irish economists of being stubborn or silly in suggesting that dismantlement of the Euro zone, or parties leaving it, would entail huge, huge difficulty and challenges. It may not be feasible at all. However, listening to the German economist on PrimeTime, I realised that economists in Germany really cannot judge what is happening at the periphery of Europe (maybe that is the problem with the Irish Economy blog, it is composed of a lot semi-rational Irish economists who agree broadly speaking). I listened to the German economist speaking on PrimeTime describe the fact that peripheral EU member states like Spain and Ireland are in trouble because of the financail crisis. I was shocked. I thought, was this guy on planet Mars for the last decade? Listening to George Lee’s lecture on podcast linked by Stephen Kinsella, I had listened to George describe a situation where Ireland had received the gold star, each year when it sent its report/accounts to Europe to be assessed. What Europe didn’t manage to do, it’s mistake, was not to identify the massive structural problem coming down the line (regardless of what the financial crisis was doing).

    In fairness to Dan O’Brien speaking on PrimeTime last night, he did try to allude to some more intrusive, front-loading of the EU review of member states government spending plans. That is a fair enough point, and Dan O’Brien mentioned that sort of measure would be critical for the survival of the Euro concept. However, Dan O’Brien didn’t go nearly so far as George Lee did in his lecture to the journalists at University of Limerick. When I listened to the German economist on PrimeTime, I was reminded of all the tough German architects I have had to project manage over the course of the Celtic Tiger boom. They are the first people I would hire for their competence levels and training. But they insist on trying to run the show before they are ready, and when things go wrong they are unable to admit to their own mistakes. That is where we are in terms of European economics at the moment. I’m sorry, but I began to realise this way back when Merkel or his finance minister introduced the concept of a European EMF, and I am only more convinced after watching PrimeTime last night. We have a problem on our hands in Europe, and it isn’t Greece, it is Germany. BOH.

  10. Brian Lucey Says:

    So….its all the fault of the foreigners? Are you sure you arent Ned O’Keeffe in disguise?
    There is a problem with global imbalances generally and Germany does need to address that. But to go from that to the argument, ad nationem, that its their fault we and other feckless types are bunched is not defensible. IMHO.
    George seems to have residcoverd oldstyle keynesianism. Which is great if we were an oldstyle more or less closed economy. As it is, we aint. The time for a modest fiscal stim has passed. Now we are deep in the quicksand. When one is in quicksand, the thing to do is counterintuitive - stop struggling (spending) and one will eventually bob to the top (achieve fiscal balance). You will be covered in mire (have massive socioeconomic disruption) but will be alive.

  11. Brian O' Hanlon Says:

    Also, to add to the above. I have no problem with the concept of the German economist’s claim on PrimeTime last night - that economic unification without political unification is basically unsound, and cannot work. I would agree with him there, in his logic at least. However, by making that point he has skillfully managed to ‘deflect’ away from the critical point from Ireland and Spain’s point of view - that in 2002, we handed away responsibility to some other authority for review and criticism of our economic policy making and planning. That handing over of responsibility is the crucial aspect in trying to identify the problems we are facing today. I mean, Garret Fitzgerald is going to write a column for Saturday’s Irish Times newspaper. But I find those columns of his increasingly unhelpful (though they contain excellent analysis), because Garret cannot conceive of a situation where Ireland doesn’t have full control over its own economic policy instruments. I know that Garret fully understands the relationship between Ireland and the EU in 2010. But someone, it is difficult for him to grasp the change that it all implies, in terms of what is required from a minister for finance (and associated permanent government departments, advisers etc), from Ireland, in 2010. BOH.

  12. Brian O' Hanlon Says:

    @ Brian Lucey,

    Don’t waste any time analysing what I have to say, before you have spent the time to listen to what George had to say in his lecture I linked above. Because the way I express something, may not convey the right meaning and insight into economic planning, that George is able to do, using his language. I only scribbled a comment above over a coffee break, simply to throw the point out there. Coffee break over, and out. Regards, BOH.

  13. Edgar Morgenroth Says:

    I had a chat with Barry Eichengreen, who was in Belfast for the InterTrade Ireland Economic Forum. While he sticks to his view that the Euro is here to stay (and I agree) and there is no way out (I don’t quite agree). We both agreed that the Greek problem is essentially terminal - talk of bailouts, loaded guns and actual bailouts are not going to get over the fact that they are defaulting and so the EU/IMF should cut to the chase and restructure the debt. The problem with this is the contagion.

    In the meantime what Krugman is suggesting could happen - my reading of his article is that he is not advocating that all EZ members revert to their old currencies but that if nothing that Greece does has any credibility then the markets will force a ’solution’ that will be very messy.

    @Colm - new currencies are nothing new and lots have been introduced in the early 90s in the wake of the break up of the USSR. It is perfectly feasable to introduce a New Drachma. The problem is that it would take time to do. The introduction of the new Baltic currencies took 2 to 3 years. While Greece leaving the Euro in an orderly manner might solve the problem for the other Euro members it is not going to help Greece.

  14. Brian Lucey Says:

    errr….you assume I havent seen/read what GL said. I did.
    Your contention is this : it aint our fault. I disagree. Its almost all our fault. All of it. We spent the money, we dis-regulated the banks, we elected and maintained a governance system that serves us ill. We. Not the voters of Hess, or the good people of Leipzig. Us, as a state.

  15. Brian J Goggin Says:

    @Brian Lucey:
    “You will be covered in mire (have massive socioeconomic disruption) but will be alive.”

    What is the nature of the mire? What forms of socioeconomic disruption do you expect?


  16. Maurice O'Leary Says:

    The Greek problem is not a currency problem but a debt problem.

    According to Constantin Gurdiev, Greece has been in default on its debt for 95 years out of the last 200 (albeit their independence was only recognised 180 years ago). So it is not exactly an unprecedented situation.

    And just like individuals, there are recognised ways of dealing with unrepayable sovereign debt through write downs and rescheduling.

    So long as the IMF and the Eurozone country loans to Greece have super senior status, we have little to worry about unless the consequent measures cause democracy to collapse in Greece.

  17. Calan Says:

    In ‘old-style Keynesianism’ the stimulus is…the deficit.

  18. Joseph Says:

    @nico - “can any country affected, including our own, really sell a recovery programme that more or less guarantees double digit unemployment, falling wages, lower government spending and general misery for a decade or more”

    The only examples I can think of where governments/juntas/dictators/etc. were able to do that (to the electorate), they had to use extreme violence, torture and containment.

    It’s hard to see anything happening other than restructuring at this point. Throwing bailout money at them surely is akin to throwing money into Anglo? You might as well go and burn it.

  19. Brian Lucey Says:


  20. colm mccarthy Says:

    Kevin O’Rourke:

    A complete financial collapse in Greece lowers the costs of a Euro exit (launch of a new currency), but also lowers the benefits, perhaps to very little. Legal tender is Euro. Even domestically, it is not clear that debts could be re-denominated. If the new currency became just a temporary transaction currency for involuntary holders (recipents of government wages, pensions) in an otherwise dollarised economy, the ‘devaluation’ does not deliver real wage cuts in the private sector or other competitiveness-enhancing effects.

    Kevin O’Donoghue:

    Bond debt is all in (what would be) a foreign currency, the Euro, or in dollars etc. To re-denominate in (devalued) New Drachma is just a default.

    Edgar Morgenroth: There have been new currencies of course in eastern Europe, but they were ‘new lamps for old’ as yoganmahew puts it. I cannot think of an example where a country in dire sraits introduced a new currency in substitution for an established superior currency.

    If anyone believes that exchange controls would work for any peripheral Eurozone country in current circumstances, please explain how.

  21. DeclanZ Says:

    Charlie Fell’s piece in the times this week is (as usual) worth a read, and relevant to this discussion…

  22. John Fay Says:

    I’m not an economist, just a layman learing from you. I just want to ask a question:

    If I were a layman in Hess or Leipzig I’d wonder today why are we Germans in the euro?

    Can you tell me what benefits the German citizens are getting from remaining in the euro seeing as it seems more possible for the strongest countries to exit the single currency (see C. McCarthy above)?

  23. Kevin O'Rourke Says:

    @Colm: a banking holiday is I guess what it would look like. But in this scenario I guess it is too late anyway since the banks have already collapsed, so perhaps the exchange control argument is redundant anyway.

    You are right, they would have to prevent dollarisation and revoke the legal tender status of the Euro. And yes, this is legally impossible, but laws are not immutable.

    To say that the cost-benefit calculus would move to the point where exiting EMU was the right decision for Greece is a strong statement, and one which I haven’t made. Nor has Krugman if you look at his post carefully. To say that a financial collapse would change the cost-benefit calculus, in unpredictable ways, is a much weaker statement, and a much more defensible one (indeed it seems self-evident).

  24. Sarah Carey Says:

    SO the vibe seems to be that a Greek default is a realistic solution.

    Is it also realistic then to consider a co-ordinated PIGS approach? So we all get together and cut a deal that solves all our problems (in however brutal manner) rather than let this thing drag on. Or is it still in our best interest to put as much distance between them and us?

  25. Paul Says:

    Lets set up a (new) bad country, call it Lillyput, move all our bad pensioners plans over, this would free up the likes of ireland, greece from massive drain on the economies…. we could then let Lillyput default…

  26. Nico Says:

    @Brian Lucey.

    “George seems to have residcoverd oldstyle keynesianism. Which is great if we were an oldstyle more or less closed economy. As it is, we aint. The time for a modest fiscal stim has passed. Now we are deep in the quicksand. When one is in quicksand, the thing to do is counterintuitive - stop struggling (spending) and one will eventually bob to the top (achieve fiscal balance). You will be covered in mire (have massive socioeconomic disruption) but will be alive.”

    So that’s it then? We just accept that tens of thousands of Irish people will never work in this country again? An entire generation must emigrate or rot on the dole here? That seems to be the logical conclusion of your quicksand analogy.

    Well, you might be right, but I am very skeptical that you can run a country on the basis of a recovery that’s a decade away.

  27. Nico Says:

    P.S. When I say recovery, I mean one that involves a fall in unemployment and emigration. Any other sort is utterly meaningless.

  28. Edgar Morgenroth Says:

    @Colm - I am not arguing that exit is optimal, and as Kevin points out neither is Krugman. I am merely pointing out that new currencies can be established but that takes time - time Greece does not have. I also do not think this will help Greece (dollarisation + the fact that in a closed economy devaluation is of limited value). But would it help the Euro?

    @Sarah Carey - this is an interesting question indeed, and I suspect it is part of the deliberations in the German government. Let’s suppose a bailout for Greece pushes their problems off the table for a year. Would Portugal be next?? Would Greece be back needing a bailout in a years time?

  29. Joseph Says:

    @Sarah Carey - “SO the vibe seems to be that a Greek default is a realistic solution.”

    …and no doubt some who haven’t already run will burn. But then, if you lie down with PIIGS you will get filthy… or however that saying goes.

    BTW - are you familiar with this story on Reuters about how Germany and France may be tying in some 4bn of arms purchases to bailout negotiations with Greece? The Reuters link is:

    Do you have any sources who can credibly confirm this? Surely this is exactly the kind of thing the public should be told about?

  30. Edgar Morgenroth Says:

    @Joseph - there is a story in the Frankfurter Allgemeine today that Greece spends 4.3% of its GDP on military expenditure and that this is one area where they could save.

  31. Brian Woods Says:

    @ Nico: “When I say recovery, I mean one that involves a fall in unemployment and emigration. Any other sort is utterly meaningless.”

    This is only true if you have a specific economic Model-in-Use (Permagrowth) in mind. But SS Permagrowth is steaming full-speed ahead into an icefield. Now we do know the outcome of this fooloshness!

    I have a nasty feeling (reading the above, and other, contributions) that our credit/debt based economies are in dire trouble. BL mentioned quicksand; seems more like a tar-trap to me.

    B Peter

  32. colm mccarthy Says:

    Kevin O’Rourke:

    ‘They would have to prevent dollarisation…’

    If they could, perhaps the pros and cons are worth discussing. But I just can’t see why people would want to hold and use a new currency introduced in present circumstances, even if it could legally be designated legal tender domestically. In Croatia, Ukraine etc the new currencies were introduced in a fervour of national independence, and crucially in substitution for unpopular and unconvincing ‘old’ dinars and roubles.

    In Argentina, the peso had never been abolished, just tied one-for-one to the dollar via a currency board.

    There may be an asymmetry here - you can join a superior currency, but you can’t leave, except if you don’t need to.

  33. Joseph Says:

    @Colm McCarthy - “you can join a superior currency, but you can’t leave,”

    I kind of fiscal ‘Hotel California’? You can check in but you can never leave…

  34. yoganmahew Says:

    “There may be an asymmetry here - you can join a superior currency, but you can’t leave, except if you don’t need to.”
    Yep. It’s a Moebius transform, I believe. Only something that was palpably better would ‘work’ as a next destination.

    There is a subversion, though. What if certain categories of public payments were made in a state delimited scrip? Much like Californian IOUs…

  35. Edgar Morgenroth Says:

    @Colm - “you can join a superior currency, but you can’t leave,” Ok, but Greece patently can’t manage the discipline needed to be part of the currency union - something has to give. Of course the Greeks expect Germany to give (them a bailout). If this (ongoing bailouts) is going to be a big drain on German resource then a new superior currency, the New Deutschmark, might not be that far away. Perhaps Greece might then be the only country with the Euro.

  36. Mack Says:

    @Colm McCarthy - “There may be an asymmetry here - you can join a superior currency, but you can’t leave, except if you don’t need to.”

    If that were true we’d be trading Sterling today!

  37. James Conran Says:

    Colm said: “I cannot think of an example where a country in dire sraits introduced a new currency in substitution for an established superior currency.”

    I’m not sure what you mean by superior (”stronger”, i.e. higher exchange rate?), but isn’t introducing a new currency a standard response to a hyperinflation crisis? Of course we’re in a deflationary crisis so this may be irrelevant pedantry on my part.

  38. Mack Says:


    “Do you have any sources who can credibly confirm this? Surely this is exactly the kind of thing the public should be told about?”

    Would that make the Germans more or less likely to send their cash to an economy where most wealthy citizens pay no tax?

  39. AL Says:

    I vote for the Lilliput plan!

  40. Sarah Carey Says:


    Hmmm now there’s a challenge. However, it wouldn’t surprise me if it was true (but the smart thing is not to be surprised by anything anymore).

    When I have asked Euronerds who the let the Greeks in to begin with (and without Eurostat checking the books?!) I was told it was the French, eager to balance German power because apparently the Greeks are Francophiles (my knowledge of Greece depends upon Greek Myths for Children, Captain Correlli’s Mandolin and a 48hour business trip to Athens during which I got the impression of utter chaos - so others will have to verify that theory). Anyway, if true, we can pin this part of the mess of the Frogs. Not that blame storming is of any use.

    My favourite story is still the loan from Goldman Sachs using the lottery receipts as collateral. Might be needing that option ourselves soon enough!

  41. Kevin Donoghue Says:

    Colm McCarthy: “Bond debt is all in (what would be) a foreign currency, the Euro, or in dollars etc. To re-denominate in (devalued) New Drachma is just a default.”

    Of course it is. That’s the scenario Krugman has in mind: “if the crisis countries are forced into default, they’ll probably face severe bank runs anyway….”

    It goes without saying that unilaterally redenominating debt in a weaker currency is a very drastic step, but when governments are flat broke they do drastic things. Krugman is silent about the mechanics of it, as you say. But history has shown that when push comes to shove, the mechanics of default are pretty simple. Of course there are all sorts of political problems, since some debt-holders are powerful.

    All that Krugman is saying, as I understand him, is that if you are going to default in any case, you might as well create a new currency in the process. Depending on how you manage after that, you might restore competitiveness and recover with only mild inflation, or you might screw up and end up with hyperinflation.

  42. Joseph Says:

    @Edgar Morgenroth - “then a new superior currency, the New Deutschmark, might not be that far away”

    Nah. Let’s call it the ‘Neuro’!

    I understand Neurontin is a drug used to treat seizures and pains caused by contagious viruses. That just about describes what’s needed for the situation :-)

    Then there’s ‘neurotic’. Or neurological disorders.

    Or better still - Neurology (from Greek νεῦρον, neuron, “nerve”; and -λογία, -logia) is a medical speciality dealing with disorders of the nervous system!

  43. Joseph Says:

    @Edgar Morgenroth - “Greece spends 4.3% of its GDP on military expenditure and that this is one area where they could save.”

    I would agree but those with a vested interest in keeping up military spending in Greece would point to Turkey, fear of, Cyprus, etc.

    However, if Angela Merkel is as hard as she reckons she is, she could tell Turkey ‘no funny stuff when we strip away all military spending in Greece or your prospects of EU entry are toast.” It would only take a phone call.

    Silly me. It would take more than a phone call wouldn’t it? It would take political will too.

  44. Joseph Says:

    … and setting aside Germany’s own vested interests (ditto France).

  45. Maurice O'Leary Says:

    I think the Germans would like the new currency for the inner core of the EZ to be known as the Euro Mark 2, or the Mark for short;)

  46. Edgar Morgenroth Says:

    @Joseph - are they not both members of NATO? You mention Cyprus - I wonder how they are feeling right now as they are very closely linked to the Greek economy.

  47. Aidan R Says:

    Perhaps I am pushing the boat out but can someone explain to me why a default by a Eurozone economy is so unimaginable? Furthermore, if a country (Greece) defaults, why assume that it has to leave the Euro?

    The Economist asks the same question (April 17th-23rd).

    Lee Buchheit, a leading sovereign-debt lawyer states in the same edition “the far greater risk is pathological procrastination by the debtor in the face of an obviously untenable financial situation”. I.e. why bother with an expensive financial emergency package in 2-3 years time in the lead up to an eventual ‘restructuring’.

    Obviously it is cheaper for governments (Germany and France) to bail out Greece now. They would have to pay more to bail out their banks exposure to its debt in a default. But, will we back in the same situation in 2-3 years time? In 2003 Uruguay defaulted and returned to capital markets one month later. The same occurred in Jamaica and Belize quite recently.

    The economist concludes in the same edition - Would a defaulting country have to leave the euro? No. “Default by a member would be a body blow to the Euros standing. But it need not spell the end of the currency”.

    It seems to me that we cannot continue with the assumption that defaults are the preserve of the ‘other’ emerging less developed market economies? It might just be easier and more common sensical to start facing up to the reality of a Eurozone default.

  48. Brian O' Hanlon Says:

    @ Brian Lucey,

    I thought this comment was quite well put, When I say recovery, I mean one that involves a fall in unemployment and emigration. Any other sort is utterly meaningless.

    I have commented before that the banking and economic resolution in Ireland requires something other than an analysis, which economists alone are lightly to come up with. Solving this problem doesn’t fall neatly into pigeon holes like Keynesian-ism or any other ‘-ism’. Pat Honohan talked about restoring confidence in the banking institutions in this country. Whereas Peter Bacon would argue the skills do not exist within Ireland’s financial institutions to accurately assess risk in terms of offering credit to the economy. The Irish banking federation chief published a piece in the Irish Times not so long ago, claiming the Irish banks were back on track, and cramming in some homework that Entreprise Ireland are providing them with - to give them knowledge, and I presume, more confidence. I spoke around this and other issues in a recent blog entry of mine, Wall of Sweat. What we are in, is an absolute mess of diabolical proportions, and we ourselves - the state - have to take full responsibility for that. But heh, don’t build me up as a straw man to knock down so easily. I am partial to all arguments, and have wrote around so many different aspects of the Irish economy, NAMA, construction industry, green economy, smart economy, banking systems at my blog over the past year and a half. I get it, it is complex and multi-dimensional. I have no problem with the ‘quick sand’ analogy either - it seems to work well to prove a point. However, if you and other economists had spent time studying human resources management in practice as I have done, you would quickly see the heart of the matter, with regards to Germany. Even ex-foreign minister Joschka Fischer is featured in todays Irish Times newspaper talking about slowness and difficulty of ‘communication’ amongst the German leadership. The Germans have a ticking time bomb on their lap, which they helped to build themselves in no small way, and haven’t a clue how to dis-arm it. The entire framing of the problem as far back, as when a German minister announced a European Monetary Fund was all horribly wrong. They wanted to characterise the problems in the peripheral EU states, as requiring intervention only in the case of a crisis. In other words, the bomb has to explode before the clean up operation is done. Which has the sequence all wrong. The fiscal bombs are all now ticking loudly, because the EU is incapable of engaging politically at each individual member state level. But the Germans refuse to admit to it, and the French are possibly too arrogant. Now proceed to admonish those stereotypes as you feel like it, but at the moment, many are living up to their stereotypes too. BOH.

  49. Brian O' Hanlon Says:

    By Derek Scally in IT, Merkel’s delay on Greek aid could lead to ‘tragedy’.

  50. Oliver Vandt Says:

    @Aidan R
    The Greek establishment must be punished severely for their multiple duplicities. But surely the country itself doesn’t deserve to be summarily thrown out of the Euro. Greece is a young democracy and the EU’s own moral currency will be MASSIVELY devalued if they are forced out and/or worse still thrown into anarchy by a viciously deep and abrupt austerity package.

  51. southofdub Says:

    The endgame is upon us.
    Like it or not, and no matter how the Politican’s spin it, essentially Ireland will be a federal state of the EU. full stop. end of story.There will be no spread between PIGS bonds and German Bund’s . All Heil to Frau Merkel>

  52. Ciaran Daly Says:

    Simon Johnson has a very interesting piece on the mess suggesting a $1 trillion bailout by the G20 for the eurozone.

    Also, Constantin Gurdgiev suggests Irish government will be hit for €4bn bailout of greece as the bailout has increased.


  53. Ciaran Daly Says:

    Wake the President!

  54. Brian J Goggin Says:

    @Oliver Vandt:
    “Greece is a young democracy”



  55. Joseph Says:

    @Edgar Morganroth - “are they not both members of NATO? ”

    Indeed they are. As I recall they were in 1974 too, when Turkey invaded Cyprus and I believe a combination of British and American threats, sorry diplomacy, kept Greece out of it. I was there. The Turkish bombing of Famagusta was very accurate - I used to get up before sunrise to observe it - they had won the NATO bombing competition the year before using their ‘lob-bombing’ techniques.

    These days (just this week was the last time in fact) they sail their frigates at top speed towards Greek territorial waters and turn away at the last moment. Lots of intimidation, probing and sabre rattling basically.

    My guess is that if they thought Greece were in a weak position, they would lay a few centuries-old land claims by sticking a few soldiers on various islands to see if they could get away with it. Funny people the Turks. You wouldn’t believe what they do to their own soldiers who fall asleep on night duty. Sadly, I was there for that too - reporting it back to the UN, later in the 70’s.

  56. Brian J Goggin Says:

    “Funny people the Turks. You wouldn’t believe what they do to their own soldiers ….”

    Well, we saw what they did to the Munster Fusiliers (and others) ….

    Sorry: I digress.


  57. Edgar Morgenroth Says:

    @Joseph - we would not have to worry about Turkey becoming an EU member then. By the way a number of German parlamentarians have suggested to Greece that they should sell a few islands - does Turkey have any money???

  58. Pope Epopt Says:

    A group of European economists associated with the European Trades Union Institute propose EU fiscal consolidation and stimulus to preserve the Euro, without the help of the IMF. I can’t find their names but assume they intersect in some way with the members of the ETUI advisory group.

    Here are their proposals, more on the PDF from the link above.

    * The ECB must provide as much support as possible to the fiscal consolidation and rebalancing effort. In the short run that means committing to maintaining its base rates close to zero. Keeping interest rates low is vital to help minimise refinancing costs while pushing up the rate of nominal GDP growth. It must continue to accept Greek bonds as collateral.
    * Euro area governments should commit to meeting Greece’s needs to restructure its sovereign bonds for a three-year period. The sums involved do not require the involvement of the IMF, whose participation is only justified, if at all, by political considerations. This would immediately and drastically reduce the market interest rates to be paid on new bond issues: the rate demanded by euro area governments should be explicitly tied to the benchmark rate for German Bunds plus a penalty rate, which should be set so as to ensure the best possible chances for consolidation while avoiding future sovereign moral hazard.
    * Greece accepts enhanced supervision of its public finances and announces a longer-term fiscal consolidation package designed to have as limited negative effects on demand as possible in the short run (notably drastically reducing tax evasion), but primary fiscal surpluses in the medium run; it couples this with a time-limited freeze on wages and administered prices and policies to increase product market competition.
    * Germany, Austria and other surplus countries commit to maintain fiscal stimulus and a period of faster-than-productivity-growth wage increases; more generally, fiscal exit strategies should be coordinated within the Council to underpin areawide economic recovery while rebalancing demand within the currency area. This requires asynchronous exit strategies. Greece and other deficit countries have to employ them earlier while the surplus countries like Germany follow later on. After the adjustment period wage policies should return to an orientation to the medium-run growth of national productivity plus the ECB’s inflation target in all countries.
    * Greece is not the only crisis country and policies are needed to prevent the crisis spreading to other vulnerable countries. The issuing of Eurobonds, possibly with a role for central bank purchases on the secondary market, should be considered to reduce financing costs. Moreover, the EU should embark on an immediate review of its various policy coordination mechanisms with a view to strengthening them and refocusing them in the direction revealed to be necessary by the crisis, namely: a symmetrical focus on surplus and deficit countries; the monitoring of private debt-savings dynamics, rather than just the public sector, and thus a focus on current account positions; incorporating wage and price setting and accordingly strengthening the role of social partners.

    Can we safely discount them on this blog because they are tangentially involved with the labour movement?

  59. Pope Epopt Says:

    @Oliver Vandt

    Goldman Sachs wouldn’t have anything to do with their (the Greek government’s) multiple duplicities, would they now!

  60. David O'Donnell Says:

    @Brian G Goggin

    1973, the Colonels in power, and the Beatles coming to tea.

    @colm mccarthy

    ‘If anyone believes that exchange controls would work for any peripheral Eurozone country in current circumstances, please explain how.’ Simply need to hit an ocean of oil and gas simultaneously.

  61. yoganmahew Says:

    @Pope Epopt
    Sounds like yesterday’s solution.

    One bit stuck out:
    “* Germany, Austria and other surplus countries commit to maintain fiscal stimulus and a period of faster-than-productivity-growth wage increases;”
    There are two balances of trade that should concern eurozone nations - the one between eurozone countries and the external one. One needs to be addressed within the eurozone, but by making the currently globally competitive countries uncompetitive, the risk (the racing certainty I reckon) is that the eurozone as a whole will become a basked case.

    Perhaps a better reductio ad absurdem solution would be to reintroduce border tariffs into the eurozone, but only where a surplus exists. Well, it is no more ridiculous than saying that the Germans should run less fast in the global race because some’ve been at the pork pies and can’t keep up.

  62. Andrew Says:

    Greece already has a de facto New Drachma available - the Greek-printed Euro notes (those with Y in the serial number) could be used as the Greek currency until actual Drachma notes were printed.

  63. southofdub Says:

    “The EU intention to introduce a control mechanism on national budgets amounts to “the development of the EU into a quasi-federal state through the back door.”

  64. Brian J Goggin Says:

    @David O’Donnell:
    Ah. I thought that the Greeks might have had some experience of democracy some time before 1973.


  65. Michael Hennigan - Finfacts Says:

    1. The credit boom enabled many countries to live beyond their means; that scene has changed and the growth of the leading emerging economies will put further downward pressure on advanced country living standards, as conventionally measured.

    In the US, the top 1% incomes captured half of the overall economic growth over the period 1993-2007. In the economic expansion of 2002-2007, the top 1% captured two thirds of income growth. The bottom 25% of the American population is poorer than they were 25 years ago.

    In Japan, the household savings rate has fallen to almost 2% from about 15% in 1990; more than one-third of the workforce are temps earning less than the Irish minimum wage. Even the big companies such as Toyota hire a large number of temps on low wages and no pensions.

    2. Most of the 16 Eurozone countries were prudently governed during easy money days and the ones under siege are authors of their own misfortunes.

    3. Germany can be easily demonised by those with a begging-bowl mentality.

    Eurostat reported yesterday that in March this year, Germany was the only EU27 economy to have lower unemployment than in March 2009.

    It went through a painful reform process in the early years of the last decade and the SPD has paid a big political cost.

    It has a large number of world class companies and mid-size family owned machine tools companies, many dating from the 19th century.

    Germany became a net exporter in food and during in 2008 for the first time in the modern era.

    In 2008, Germany exported to Greece goods worth €8.3bn. Germany was the biggest purchaser of Greek exports, accounting for nearly 10% (€1.9bn in 2008) of the total. The most important Greek exports to the Germany are textiles, petroleum products, tobacco, olive oil, fruit, cement, tomato products and aluminium. The principal Greek imports from Germany include motor vehicles, machinery and other technical products, petroleum and petroleum products, foodstuffs, as well as raw materials.

    4. In 2009, the total value of Greek goods exports totaled €14.4bn accounting for 6% of Greece’s GDP; imports fell to €48.1 from €60.7bn.

    Greece shipping accounts for about 60% of the EU shipping total and total exports were €55bn in 2008 or 23% of GDP; the current-account deficit is currently 13% of net national income.

    5. Greece requires significant reform; tax evasion is extensive and 20,000 teachers are without classrooms. It needs to get serious about inward investment.

    6. It is better to leave the issue of debt restructuring until the end of the 3-yr adjustment period when Europe can better handle it and Greece will likely be in better shape; to consider it now could trigger further pressure on other PIIG countries.

    7. Greece has received €44bn in EU structural funds since 1994 and total EU transfers have exceeded 3% of GDP in recent years.

    7. In the US, there is no bailout mechanism for states and no intergovernmental loans.

  66. Aidan R Says:


    “Germany can be easily demonised by those with a begging-bowl mentality”

    Isn’t this normatively loaded statement precisely the problem? The Eurozone is what it is and public money being spent on one region/state should not be considered charity. It is the reality of an interconnected regional peripheral-centre economy sharing the same currency. What is required is greater European wide coordination in fiscal policy. In short, it requires more federalism and less nationalist-centric logic.

    Germany and the 16 other Eurozone countries behaved since day one of the Eurozone as if they were managing their own currency. Every country is collectively responsible for its lows and highs. It is a collective action problem that requires a collective response.

  67. Brian O' Hanlon Says:

    @ MH,

    Thanks as always Michael, those points are very interesting and useful. I this one particularly true.

    In the US, the top 1% incomes captured half of the overall economic growth over the period 1993-2007.

    The question I have though, is people who are in the enviable position to capture the economic growth, don’t seem to know or care what is going on around them. When I grew up as a kid in Ireland, I always learned in school about the difference between ourselves (as badly off as some of us were) and people in much, much poorer regions of the globe. When I was growing up there was always a neighbour or someone you knew working for concern or some missionary out abroad. But what has become clear in the last two decades, is that a similar gap has emerged between one side of society and the other, in the countries we live in, in the first world.

    However, I keep on reading in the history books, that the inequality of society in the United States in the 1920s, immediately before the Great Depression was even worse than it was today. One of the lessons I think that Kenneth Galbraith talks about in his book on the Crash of 29, was that capitalism couldn’t quite work, when you had the sort of inequality that exists in 1920s America. BOH.

  68. Brian O' Hanlon Says:

    @ MH,

    The bottom 25% of the American population is poorer than they were 25 years ago.

    Not to mention the level of ‘risk’ which the average middle class family in 2010 is exposed to, without any of the buffer protections that were there 20/30 years ago. I think this is what has provoked the acrimonious clash between private sector and public sectore in Ireland. It isn’t so much the conflict between public or private, but the fact that the middle class in general is scurrying as fast as possible to the last few remaining bastions in the economy, where some semblance of the old rules exist. That is, the comfort and protection levels that traditionally the middle classes held dear - and made membership so sought after. It has turned into a crap shoot in 2010.

    I was particularly disappointed on the Pat Kenny show recently, when he interviewed Emer O’Kelly, (former newsreader? ??) columnist for a newspaper and another legal expert about the issue of civil rights partnerships. I think that Emer O’Kelly was stating the example of the United States, where the single parent got a job and supported herself, in preference to depending on a spouse. But it is clear to me from research Elizabeth Warren has undertaken, that in the United States, a single parent earning a top salary in a good profession or industry, cannot make it work. Things have become so, that to compete in housing markets etc (dicated by access to school places and so forth) the second income is a necessity. Even where the single parent does go out and work, in the best of circumstances, the numbers still don’t add up. I was disappointed that neither Emer nor Pat Kenny had the insight to raise that crucial point. BOH.

  69. Mick Costigan Says:

    On Eurozone breakup, the best analysis of the possibilities was done by Munchau and a colleague at Eurointelligence last year, where they laid out 8 scenarios for possible eurozone collapse:

    I am surprised at the level of pooh-poohing of the idea that’s taking place here, without reference to the types of possibilities discussed in this document by a respectable economist.

    On the other point that has been discussed of, to use more colourful language “the progressive immiseration of the working class in developed world countries at the expense of global capital”, try this video of James Goldsmith in 1994 discussing his opposition to the GATT Uruguay round with Charlie Rose and with Laura D’Andrew Tyson, President of Clinton’s Council of Economic Advisers:

    The one point to add to Goldsmith’s 1994 argument would be that the mechanism by which this progressive immiseration of the working class in the developed world was enabled without provoking widespread unrest was, of course, the massive expansion of personal and household indebtedness. And that game appears to be at a sticky end.

    Cynicus Economics has been making the same points in reference to the UK for a number of years. [NB he also makes many elementary mistakes but his broad narrative is compelling]

    So where to now?

  70. Ernie Ball Says:

    Nice to see my suspicions about Sarah Carey confirmed. If ‘frogs’ is acceptable nomenclature for the French, is ‘micks’ OK for the Irish?

  71. Al Says:

    What were your suspicisions???
    Anyone else look shady here?

  72. Pat Donnelly Says:

  73. Joseph Says:

    @Brian O’Hanlon - “I think this is what has provoked the acrimonious clash between private sector and public sectore in Ireland”

    Disagree - in that it has been ‘engineered’.

    Though of course you have to have some fertile ground to throw your seeds on to make them grow.

    The middle classes are starting to see neighbours, that once had good jobs etc. still out of work, second car gone, cleaner no longer calling on a Monday, ‘there but for the grace of God…’ feelings and are starting to run a little scared. Any big mortgage rate rises in the next year or two will really press the panic button.

  74. Michael Hennigan - Finfacts Says:

    @ Aidan R

    “It is the reality of an interconnected regional peripheral-centre economy sharing the same currency. What is required is greater European wide coordination in fiscal policy. In short, it requires more federalism and less nationalist-centric logic.”

    The ECB has had a major role in supporting/preventing failures in the banking systems in Ireland and other embattled economies since Aug 2007.

    As we know, fiscal policy was left to member states and Trichet said last Thursday that “the crisis has revealed some of the shortcomings of national policies to comply with the requirements of an economic union. In particular, in a number of cases, national policies that are responsible for domestic public finances and for the competitiveness of member economies have not achieved their objectives.

    But the crisis has also revealed weaknesses in the peer surveillance process and in the implementation of the Stability and Growth Pact. Thus another major lesson of the crisis is the need to strengthen the institutional framework of the economic union.”

    Neither Ireland or Germany now favours closer integration; Germany fears more political control would compromise the independence of the ECB; Ireland for example opposes tax harmonisation. However, there will be more central control and surveillance in future and it will be much harder to join the EMU.

    Critics have a point that tough demands on Greece will make it more difficult to achieve fiscal targets but it is likely the only way to help Greece in the longer-term. An aspirational fudge would not help Greece reform. Just look at how difficult it is to get change in Ireland.

    As for commentator comments on the external value of the euro, China is likely to have a bigger influence on that in the short-term than the ECB or Angela Merkel.

    @ BOH

    It is interesting how the vocal vested interests who did so well from the Irish bubble have nothing credible to say now on how best to get back from the abyss: IBEC calls for public sector reform but is silent on the cosy cartels in teh private sector; ditto for the trade unions and so many more.

  75. Brian O' Hanlon Says:

    @ MH,

    I found it ironic the other day, when I was in group conversation with some people, wondering what to do with a lump sum they came into. I believe the conclusion of that meeting was, they would seek wisdom and insight form their local bank manager and/or auctioneer. I thought to myself, no matter what happens, the same old institutions will always win out. They seem to know that also (I could start to draw all kinds of creative analogies, a la Fintan O’Toole, between the religious hierarchy’s power in times past, and that of banks in today’s work - but I’ll refrain for the moment).

    Notwithstanding the above, as I listened to a podcast recently on the function of bankers within local level society. That is the banker playing golf with various parties, things are mentioned off the cuff, which wouldn’t be said over phone or email. The local bank manager does play a sort of role within society, in being able to see connections and distribute advice - you should talk to so and so. It was a good point and it was well made, about the banking system. I think it may have been Robert Shiller talking in one of his Yale university lectures. I am almost sure it was. BOH.

  76. Brian O' Hanlon Says:

    @ Joseph,

    I don’t have to remind you, you are up to your oxsters in exam time, so head down now. But to re-embellish my point about the middle classes and the private/public conflict as portrayed in the media. What I think is happening, really, in Ireland, in the United States and wherever they managed to create a social strata commonly referred to as the middle class, that strata is being attacked. It’s exposure to risk, if a child gets sick, if a spouse loses work or runs into difficulty for medical reasons and so on. There is absolutely no buffers left anymore. If a kid gets sick, a parent has to devote more time and it leads to loss of one income, which leads to difficulties financially. There is no margin. Of course, as Elizabeth Warren always points out, there is always the percent of ‘lucky’ families, for whom life is a straight run, without undue bumps and potholes. That ‘middle class’ will still be there, and become evidence in propaganda - look, this is how it can be.

    To clarify what I tried to say above - the middle class erosion which is so well described by Ms. Warren’s research - and is relevant to Ireland, is the really important thing to observe. We haven’t quite recognised it yet in Ireland, because no studies have been conducted, no one has highlighted it and no politician is going to stand on that mandate. Even Ms. Warren herself noted the in-built inertia in flagging any problems that may crop up, with middle class society. Because there is such a weight of perception, historically, that the middle class was boring, it was un-changed for decades and it was secure/stable. That prevents researchers doing serious research, because the middle class society is not seen as an interesting enough area. What could possibly be interesting about it? Ms. Warren’s research into the middle class in the US, of course, is linked in many ways with her investigation of credit card industry, and consumer lending practices across the board. The two issues are interlinked.

    There again, in Ireland, we have identified the consumer credit default problem as something coming down the line with potential consequences. Brian Lucey has referred to it as the ‘third wave’. But what needs to happen in Ireland is a real look at society and its level of indebtedness. Even Dermot O’Leary of Goodbodys wrote a fairly decent piece for the Irish Times now so long ago, Access to new credit crucial for turnaround, on February 19th 2010. In summary, what I believe has happened in Ireland, is that we are trying to have a serious debate on the situation at the moment, of the middle class in Ireland. But by some odd set of circumstances, attempts to have that serious debate have become hijacked, and re-packaged. The residual debate that we are left with, is this public sector versus private sector debate. A debate, which I believe is being used by various interests, political, business and otherwise to serve their own needs. Rather than having a true debate, which might shed some light on the situation of middle class indebtness, and help Irish society for real. As I said, Emer O’Kelly on the Pat Kenny radio show suggesting that one woman with sufficient education, effort and a good work ethic, ‘can make it without a man’, in 2010 - belies how under-developed the debate it Ireland has got. We aren’t investigating the research into socio-economics that is out there. We aren’t fully informing ourselves. Pat Kenny and Emer O’Kelly do a pretty good job, but it could be done a lot better. BOH.

  77. Brian O' Hanlon Says:

    @ All,

    Here it is in blog-ified format for easier linking. I just think the stewardship of social science research by bodies such as trade unions has been sub-standard in recent years. The intelligent and useful sort of comment, from the social movement in Ireland which should be contributed from that sector, has not been offered. Not in the way that American socialist and writer Mike Davis argue it should. The intellectual contribution from the social movement in Ireland hasn’t been present, and I don’t know if it ever was. BOH.

  78. Fixing the Eurozone without PIIGS deflation and penury – Smart Taxes Network Says:

    [...] to be admitted, but that does not seem to be sufficient reason why they do not get coverage in any Irish economic publication or blog, Left or Right, that I can see.  Novel socially destabilising ideas do get coverage – the [...]

  79. Brian O' Hanlon Says:

    @ All,

    I noted an advertisement on RTE television this evening, for a documentary program about an Irish writer based in New York, Colum McCann. In the short snipet I listened to, he suggested nobody wanted to hear about his dull, boring middle class life as a writer in New York city. People wanted to read his descriptive stories about homeless people living in subways in NYC. There again, when it comes to selling your writing or whatever, it is the extremes which sells the most copy. BOH.

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