Saturday, May 26, 2012

Greek wrestling

Showing the way in or the way out?
Simon Wren-Lewis believes Greece might stay in the euro. His analysis is quite convincing, because it looks at the intricacies of European politics rather than at the reality of economic figures. In Europe, politics prevails over economics (that's why there is the euro in the first place). According to his analysis,
  • The Germans will give ground,
  • The Greeks will be able to renegotiate their loans,
  • The ECB will provide the Greeks with the liquidity they need.
All this sounds reasonable, since there is no obvious alternative. But it does not say whether it will happen at once or gradually. Gradually seems more likely for three reasons:
  • European politics is slow, and Europeans are notoriously unable to reach conclusive agreements.
  • Even if they were, they would not want to relax too much the pressure on Greece (that still needs to implement lots of structural reforms).
  • They would fear that being too soft on Greece might give ideas to other south Europeans countries.
In a sense, that's what's already been happening since Mr Draghi replaced Mr Trichet at the head of the ECB.  And that's what could go on for a while. There are however three problems:
  • It might be conditional to the outcome of elections in Europe, starting with Ireland next week and Greece two weeks later.
  • It would not resist the bank run that might be imminent.
  • It might help the Greeks, but it would not improve the situation in Spain or Portugal that would continue to fall down the recession slope (unless, against all evidence so far, reforms and austerity work magic and restore growth on their own).
Simon Wren-Lewis is probably right about what Germany and the ECB will do, but it's not obvious that it will be enough to keep the eurozone together. If Europe wants to change the course of events, it must come with better than an uncertain and temporary solution.

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