Snippets from a Vanguard newsletter . . . . .
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Is there a real possibility that Greece will leave the euro?
Peter Westaway: If you had asked me a few months ago, I'd have said absolutely not. Now I'd still say, on balance, that I think not, but the chance is much higher. The costs would be so enormous that policymakers in the EU will move heaven and earth to keep Greece in the EMU (Economic and Monetary Union).
If Greece could leave without causing serious contagion, then its departure could actually have advantages. But it would be very painful for Greece to do so unilaterally—for instance, if they elected a government that turned its back on the Eurozone. In that case, Greece wouldn't be able to pay its bills—it couldn't pay its civil servants or its pensions.
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What's at the root of the issue? Are Greece and the EU having second thoughts about this marriage?
Peter Westaway: Greece shouldn't have been in the euro area in the first place. If it had conducted an economic assessment of the pros and cons, it would almost certainly not have joined. I was at the Bank of England during the creation of the euro, and we did a five economic tests assessment to see whether the United Kingdom should join the euro area. But the U.K. was unusual—most other countries made a political assessment.
Countries like Greece have enjoyed benefits from membership in the monetary union—they gained a central bank in the European Central Bank, which could be trusted to follow a responsible monetary policy. But losing independence over monetary policy means that individual countries lose control of their own interest rates and exchange rate, thus removing an important mechanism for adjustment and putting more onus on the need for flexible wages and prices. And membership also came with obligations related to fiscal policy that Greece wasn't quite ready to meet.
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Peter Westaway: It really may take Greece leaving before Germany will seriously consider conceding on eurobonds. Even then, Germany may only agree to such bonds under circumstances in which all euro area countries are playing by the rules and not running up debts.
(CrossPosted By: Zim.)
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