Category: EMU

Greece and the Threat to the Euro

I read time and again, for instance here, that Greece’s debt crisis “threatens the euro”. Indeed, there are lots of right-minded people around Europe who worry deeply about this threat and have determined that a Greek default has to be avoided to save the euro. I’m having trouble, however, figuring out what that this is supposed to mean.

There seem to be different interpretations of what the “threat to the euro” is. The more dramatic interpretations invoke the idea of an existential threat. Others view it as involving reputational harm. I’ll take each of these ideas in turn.

Continue reading “Greece and the Threat to the Euro”

The EU Statement on Greece

Here is the text issued by the EU leaders:

We reaffirm that all euro area members must conduct sound national policies in line with the agreed rules and should be aware of their shared responsibility for the economic and financial stability in  the area.

We fully support the efforts of the Greek government and welcome the additional measures
announced on 3 March which are sufficient to safeguard the 2010 budgetary targets. We recognize  that the Greek authorities have taken ambitious and decisive action which should allow Greece to regain the full confidence of the markets.

The consolidation measures taken by Greece are an important contribution to enhancing fiscal
sustainability and market confidence. The Greek government has not requested any financial
support. Consequently, today no decision has been taken to activate the below mentioned
mechanism.

In this context, Euro area member states reaffirm their willingness to take determined and
coordinated action, if needed, to safeguard financial stability in the euro area as a whole, as decided the 11th of February.

As part of a package involving substantial International Monetary Fund financing and a majority of European financing, Euro area member states, are ready to contribute to coordinated bilateral loans.

This mechanism, complementing International Monetary Fund financing, has to be considered
ultima ratio, meaning in particular that market financing is insufficient. Any disbursement on the
bilateral loans would be decided by the euro area member states by unanimity subject to strong
conditionality and based on an assessment by the European Commission and the European Central Bank. We expect Euro-Member states to participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible by risk adequate pricing.  Interest rates will be non-concessional, i.e. not contain any subsidy element. Decisions under this mechanism will be taken in full consistency with the Treaty framework and national laws.

Eurozone quote of the week

From Wolfgang Schäuble, in the FT:

Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union while being able to remain a member of the EU.

If you wanted to set up a system which maximised the probability of self-fulfilling market panics and speculative attacks, this sounds like a good way to go about it.

Setting a standard in fiscal reform and oversight

I return to the case for a new fiscal framework in today’s Irish Times: you can read the column here.

Scary graph

The first graph in this post is really quite alarming. (It would of course have been nice if there had been Irish data!)

For an individual country, ‘internal devaluation’ is the optimal strategy in our situation. (Optimal given our constraints that is — it is an incredibly lousy option relative to nominal devaluation, or being able to run a counter-cyclical fiscal policy.) But if everyone is doing the same thing, then it becomes collectively self-defeating.

This is a European problem, and requires European solutions designed to support demand and prevent continent-wide deflation.

Paul Krugman is alarmed here.