The future of European stabilty?

[Uboat509]

It is impossible to know for sure what would happen but there is no doubt that a disorderly Greek default and exit from the Euro will have big consequences both in Greece and around the rich world. In Greece, many businesses will find that they still owe external debts in Euro that they have little hope of repaying causing many failures. The cost of European imports will become prohibitive for many businesses as well with similar results. Outside of Greece, a good many banks have at least some exposure to Greek debt although those that can unload it are doing so but more harmful than that is risk of spreading contagion. Italian and Spanish bonds are already trading at near unsustainable levels. A disorderly Greek default followed by its exit from the Euro may throw the bond market into chaos and leave Italy and Spain as well as possibly others unable to service their debts, which could lead to defaults or even a collapse of the Euro. The contagion could be contained but only by swift and decisive action by Europe's politicians, which we have not seen thus far.

[Fuchs]

In Greece, many businesses will find that they still owe external debts in Euro that they have little hope of repaying causing many failures.

That's no issue this time. Remember, the old currency (Euro) would not lose value as in other monetary reforms. They would still be able to do business in Euro.
A new indigenous currency would rather be introduced through requiring payment of taxes in it and through paying public servants as well as contractors with it.

The Greek industry would not have substantially greater difficulties paying Euro bills then than now.
Besides; bankruptcy laws can be written to national advantage.

[Uboat509]

That's no issue this time. Remember, the old currency (Euro) would not lose value as in other monetary reforms. They would still be able to do business in Euro.
A new indigenous currency would rather be introduced through requiring payment of taxes in it and through paying public servants as well as contractors with it.

The Greek industry would not have substantially greater difficulties paying Euro bills then than now.
Besides; bankruptcy laws can be written to national advantage.

How would Greek industry not have significantly greater difficulties repaying Euro bills? The Drachma will still be worth much less than the Euro and Greek monetary policy can only go so far to alleviate that. Ultimately Greek industry will be required to pay a much larger percentage of their available capital to purchase Euro than many of them can afford.
As for the Greek government re-writing bankruptcy policy, I am not sure how making bankruptcy easier to declare is going to help.

[Fuchs]

How would Greek industry not have significantly greater difficulties repaying Euro bills? The Drachma will still be worth much less than the Euro and Greek monetary policy can only go so far to alleviate that. Ultimately Greek industry will be required to pay a much larger percentage of their available capital to purchase Euro than many of them can afford.
As for the Greek government re-writing bankruptcy policy, I am not sure how making bankruptcy easier to declare is going to help.

Right now Greek industry is in peril because it has a fixed currency exchange rate, while with Drachma it would have a flexible one. That's a much better situation and will yield greater exports. Those exports plus the cash available right now needs to suffice for paying imports and foreign debt. It may not be easy, but what counts is the change.
Right now they're proved their inability to compete on large scale on foreign markets simply because they'd need a different exchange rate than 1:1. Their ability to gain Euros domestically doesn't appear to help enough, for the macro picture shows that this ain't enough. Greece has a major trade balance deficit.
The value of the Drachme would be of no concern, actually. I don't know why people are so interested in the value of foreign money. All you need to know is whether you can exchange it easily into another currency. There's no economic substance between the difference of printing a 10 or a 100000 on a piece of paper.
Besides; the Drachme might even grow stronger in regards to the exchange rate if the Euro : Drachme exchange ratio is being set to too weak initially.

Besides; all domestic debt could be converted by law into Drachme.


There were a couple examples for introduction of a new currency for leaving a currency that continues to exist. All the break-away state on the Balkan and in East Europe and Caucasus region did it. Sadly, none mirrors the Greek case very well.


About bankruptcy laws; it's possible to write a bankruptcy laws in which all outside capital simply turns into equity capital during a bankruptcy, without termination of the business. No company would ever need to die just because it cannot pay bills. That's simply a matter of will of the legislative.

[Compost]

Stratfor has published another of George Friedman’s masterly sitreps: this one on Germany’s current and largely self-generated problems relating to Ukraine and Greece.

https://www.stratfor.com/weekly/germ...eid=5da0feb2eb

[davidbfpo]

Compost,

An interesting article thank you. Germany certainly has issues and concerns over the potential decisions by the new Greek government - they are not alone.

There was a tweet yesterday showing the minimum wage level in four EU countries, Greece had the highest by a good margin. The other three were all small Northern European nations, who are IMHO in effect being asked to pay Greece. I cannot now locate that Tweet.

This morning on BBC Radio Four a Finnish person commented that the budget support requested by Greece meant a 5% GDP transfer, something he appeared to doubt any Finn would support.

Supporting Greece could easily become a unpopular political issue, which I am sure affects such Euro-enthusiasts as Chancellor Merkel.

Incidentally the cited author refers to few nations wanting to join the EU now. That is simply wrong. Seven nations are waiting, all but one small: Albania, Bosnia, Iceland, Kosovo, Macedonia, Montenegro, Serbia and rather hesitantly nowadays Turkey. See:http://www.bbc.co.uk/news/world-europe-11283616

Latvia even started to use the Euro January 1st 2015.

[Firn]

I was going to point that out too, there are quite a few countries eager to join the EU. In fact that there are just no large European nations left to join the EU apart from Ukraine, Russia and Turkey shows the great success of the EU as a political and economic project. The Euro fiasco has been a terrible blow and is partly responsible for the economic hardship of millions, the political system of the EU has some well known flaws but as 'the Germans say, 'you must empty-out the bathing-tub, but not the baby along with it'*

The article rightly points out that Germany has emerged as Europe's most important political player and quite reluctantly so in some areas. Isn't it ironic that the growing importance and political power is according to the article linked to the 'extraordiarily uncomfortable position'?

If it is too much to say that Merkel's world is collapsing, it is not too much to say that her world and Germany's have been reshaped in ways that would have been inconceivable in 2005. The confluence of a financial crisis in Europe that has led to dramatic increases in nationalism — both in the way nations act and in the way citizens think — with the threat of war in Ukraine has transformed Germany's world. Germany's goal has been to avoid taking a leading political or military role in Europe. The current situation has made this impossible. The European financial crisis, now seven years old, has long ceased being primarily an economic problem and is now a political one. The Ukrainian crisis places Germany in the extraordinarily uncomfortable position of playing a leading role in keeping a political problem from turning into a military one.

Personally I don't think that Germany is feared as it is fully integrated into the European system in many ways and a web of larger alliances. It is far from being isolated even in that Greek tragedy°. The big role it plays currently is also in part due to Merkel's strong internal position. No other large EU members have no political figure which dominates the internal landscape in such fashion and none of it's had the less bad economic performance then Germany. All in all it is important to keep in mind that it is still a great luck to be currently in such an 'uncomfortable position' as Germany, or the EU as a whole or the USA.

*German proverb

°I largely support the Greek position on austerity.