Breaking: ECB states that Euro is reversible and not irrevocable
Why all tis attention for Greece and not for Croatia or Slovenia? Because Greece is where the main battle is fought. But on this blog more attention will be paid to other countries. Anyway: a Greek referendum about the euro is a very good idea – but this might be the worst time to hold one. You can do this when you still have a lot of cash somewhere. Or when you’re already in default. But announcing a referendum when you’re on ELA – it’s not a good idea. Surely when the creditors have one overriding goal: they want you out of government. And they play to win. Which means that you have to kill them. Or lose. Inflicting a wound and crippling them (which surely happened) is not enough.
A) Breaking (and I can’t stress enough how important this is): the wound is really deep, as the ECB changed its mind in a fundamental way. Up till now the ECB has been adamant. THE EURO IS IRREVERSIBLE, adopting it is irrevocable. But they changed their mind (and historians of course knew better all the time). Yesterday, an interview with Benoît Cœuré, one of the highest ranking civil servants of the ECB, started with this sentence: La sortie de la Grèce de la zone euro, qui était un objet théorique, ne peut malheureusement plus être exclue. Translation: Grexit can’t be excluded, anymore. See also Charles Wyplosz about this (aside – the eight year non-renewable mandate of ECB board members mentioned by Wyplosz reminds me of proposals made by Hayek about how we should change our parliamentary system – can’t remember exactly where he wrote this).
Some additional links
B) It’s not just about lazy Greek (oops, longest workweek in EU): these guys saw it coming as they look at the Euro institutions:
Wynne Godley in 1992
Milton Friedman in 1997
Paul Krugman in 2010
See also Adam Posen in 2015
All share at least to an extent the same basic analysis. A Monetary Union also needs to be a transfer union (including deposit insurance) and a lender of last resort union. Mind that the Friedman stance which implies that even USA levels of labour mobility and price flexibility are not enough to stabilize the economy on the state level is, at the moment, considered ‘radical left’ in Europe.
C) Barry Eichengreen did not see it coming. And explains why: “Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.” (He’s talking about Tsipras c.s. but especially about the other politicians). My view: if the ECB had really tried to prevent a bank run it should not have limited the possibilities of Greek banks to raise money on February 4, 2015. From that moment on it was clear that it had the Greek economy in a stranglehold (and the ECB did not exclude Grexit) – a situation a Central Bank should avoid. But maybe Eichengreen sees the ECB civil servants as politicians.
D) Dean Baker has an interesting take. Even when Greece is kicked out of the Euro Area – they can still use the Euro. Imo this however requires a sizeable current account surplus while people and companies also neither should start to hoard money or wire it abroad. Hmmm… even in a country like Greece with about ten million inhabitants households love to hoard tens and even hundreds of billions of Euro (including saving accounts at banks).