Tuesday, May 22, 2012

Barry Eichengreen asks, "Is Europe on a Cross of Gold?"

Or at least his headline writer for Project Syndicate asks that on his behalf: Is Europe on a Cross of Gold? 05/11/2012.

At this point, reflections on how the euro might survive, and more specifically about how Greece might stay in the euro, sound increasingly academic. But the euro is still functioning. And the eurozone countries including Greece say they want even Greece to stay in the euro.

Barry Eichengreen's piece talks about comparisons between the eurozone countries' situation today with those of European countries on the gold standard during the Great Depression. He can't resist saying:

I wrote the book on Europe and the gold standard. Literally. In Golden Fetters: The Gold Standard and the Great Depression, published in 1992, I argued that the deflationary engine that was the gold standard was a key cause of the 1930’s depression, and that abandoning it opened the door to recovery.
And he analyzes some key differences in the eurozone's situation today, such as the fact that hostility between European nations is lower and that the eurozone countries have given up their own national currencies.

Yet his prognosis for the euro's survival depends on doing things to which German Chancellor Angela Merkel has been stubbornly opposed, like permanently expanding the powers of the European Central Bank (ECB).

And there is one likely fatal problem for the euro that in a way is the opposite of one of the key gold standard problems then:

In the 1930’s, countries could not act together because they could not agree on a diagnosis of the problem. Each attributed the Great Depression to different causes, leading them to prescribe different remedies, which they administered unilaterally.

Agreement today on the diagnosis facilitates mounting a common response. Unfortunately, there is growing evidence that the medicine on which European countries have agreed – austerity – is killing the patient. There is now talk of adjusting the dosage, but talk has not yet given way to action.

Will things turn out differently this time? There is no question that the greater scope for cooperation that exists today bodes well for the euro. But it is the precise policies on which European governments cooperate that will tell the tale.
And time is fast running out.

One problem with the Greek exit is that Greece owes substantial sums directly to the ECB, €134 billion according to a recent Bloomberg Businessweek count (05/21-27/2012 issue).

Deutsche Bank's chief economist Thomas Mayer has just suggested a parallel currency for Greece, kind of a second euro. This has produced yet another neologism in this crisis, "Geuro" (Greek euro).(See Barbara Schäder, Schuldenkrise: Griechenlands Alternativen zum Euro 22.05.2012) The idea here comes down to the same thing as the rescue plans so far have focused on: having public institutions in Europe prevent losses to European banks. Deutsche Bank is on the hook to Greece directly and via the ECB. A German economic adviser, Udo Neuhäußer, suggested something similar earlier. His variety was even grimmer, which involved basically have the EU seize all Greek state property. (What the hell do they teach German business types in university history classes? Are they that clueless about how bad stuff like that sounds coming from German officials public or corporate? Have these people been reading only the financial pages in the news for the past 30 years?)

Schäder describes as another alternative what sounds like just a variant on the same idea, which she calls double-accounting. In it, Greece would have their own currency but wouldn't be able to depreciate their debts, i.e., they would still have to pay the euro equivalent on their debt. Something may be missing from the article on this idea, suggested by Polish central banker Marek Belka. I don't see how this differs from Greece dropping out of the euro and having their own currency unless there is also some kind of prohibition on defaulting on the sovereign debt, which in any case is denominated in euros, so far as I'm aware.

Another idea she describes is what she calls "express money". The idea here is that instead of actual currency, the Greek government would issue vouchers that would expire after a certain time. This one sounds to me like something that would make the black market explode and push a large part of economic activity off the officials books and even create a huge barter sector. And how this creates any advantage for anyone unless defaulting on euro-denominated debt is prohibited.

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