Friday, June 26, 2015

More Greek Notes

perhaps Greece should be printing some notes this weekend...

Recently, Christian Odendahl had a sensible take on what should be done in Greece, but reasonable advice from economists is being overtaken by politics and events.  Catherine Rampell:
Greeks are hoarding cash and sending their savings abroad; by a conservative estimate, Greek bank deposits have fallen by about 45 percent since their peak in 2009. Recent talk of capital controls and bank closures has only accelerated this bank run (or, as some have dubbed it, a “bank jog”), making the banking sector weaker, and, by the day, even more in need of European assistance. Last week alone, Greeks withdrew an estimated 4 billion euros. For those keeping track, that’s two-and-a-half times what the country owes the IMF at the end of the month. 
Karl Whelan discusses the connection between a Greek government default, the ECB and a euro exit -- in theory, the ECB could help Greece stay in the euro even if the government defaults, but it doesn't appear inclined to.  Ultimately, if the euro is to avoid similar crises in the future, it needs to be robust to a sovereign default.

Reports over the deal terms being discussed are hardly encouraging.  Wonkblog's Matt O'Brien writes:
Europe is making life so difficult for Greece with such specific demands for austerity that it almost seems like Europe is trying to get Greece to leave the euro now. Before this latest showdown, Greece had actually cut so much that it had a budget surplus before interest payments...

But Europe isn't interested in that. It's interested in making Greece run bigger and bigger budget surpluses, without much regard for the economic consequences. Not only that, but Greece has to run surpluses the way Europe wants them to. Never mind that Greece has already cut its spending a lot, already cut its pensions a lot, and already reformed its labor markets a lot. There are always new cuts and new reforms that Europe says will make Greece grow at some point in the future.

If this is how it's going to be, why should Greece stay in the euro? It sure seems like Europe is trying to force Syriza to do what Syriza said it wouldn't just to prove a point: don't underestimate the power of the ECB. It's a not-so-subtle message to the anti-austerity parties in Spain and Portugal that they have nothing to gain and everything to lose from challenging the budget-cutting status quo.
Although its the EU that deserves most of the blame, the IMF's role has been controversial, too: see this Politico article and this Ambrose Evans-Pritchard column.  At the IMF's blog chief economist Olivier Blanchard explains what the IMF believes a "credible deal" requires.

See also: James Galbraith on "reform", and Branko Milanovic on what this means for Europe.

Update (6/29): The Greek government has called a referendum and imposed capital controls.  See Eichengreen, Krugman and Stiglitz (and Tony Yates for a take somewhat more critical of the Greek government) Charles Wyplosz on the ECBFrancisco Saraceno and Matt Yglesias on the politics, and Hugo Dixon on how the referendum may play out.