European crisis far from over; exit from eurozone still beckons

The agreement of the EU countries minus Britain to adopt central oversight over members’ national budgets, i.e., fiscal union, does not solve the problem that has been roiling Europe all these months. It is really just another form of what has already been the case. That is, the European Central Bank and other entities will continue to buy the bonds of the troubled countries, only now there is central control over those countries’ spending and taxing. And that central control is pushing them in the same direction as the previous agreements, under which they received vast infusions of credit in exchange for adopting extreme austerity measures that are killing them economically (as Paul Krugman believes, and his argument, for once, seems reasonable), or that at least will be extremely painful to them for decades to come. Why should they accept those strict controls, and such a grim future, when they can escape the whole mess by reverting to their respective national currencies and devaluing them? For example, Greece, by returning to the drachma and devaluing it, would be able to start selling things and attracting tourists again, thus restoring its economy. As the New York Times puts it:

While [devaluation followed by probable default] would certainly hurt European banks, the European Central Bank, which owns around 60 billion euros or so of Greek bonds, would suffer the most.

Unless the International Monetary Fund agreed to help, Greece would be unable to borrow from abroad. On the plus side, with a cheap currency and restored control of its monetary policy, Greece’s chances of returning to growth might improve drastically.

While their numbers remain small, some Greek economists say that this is the only way to address the country’s persistent inability to balance its trade. Theodore Mariolis, an economist at Panteion University in Athens, argues that a devaluation of 50 percent or more could close Greece’s trade gap without sending inflation soaring—an outcome that many economists might regard as too good to be true.

Posted by Lawrence Auster at December 12, 2011 06:20 PM | Send