Tuesday, May 4, 2010

Greek Solution - UPDATE

This so obvious, that it won't happen, but I can't believe it took me until today to figure it out. The whole reason for the crisis is that the Greeks can't slowly default by monetizing their debt (i.e. devaluing their currency thereby inducing inflation) the traditional deadbeat and third world way out of this kind of jam. This is because they use the euro as their currency and can't print more. Further, their deficit and debt ratios exceed the thresholds imposed by the treaty that admitted them to the union. Since they lied about their finances, violating the treaty, the EU should just expel them. Then they can do whatever they like. Since that will also put them outside the EU, it will also staunch the bleeding in the EU markets. Further, it will have a salutary effect on any other member nations not getting their act together.

Of course, this won't happen, because the whole world has adopted the paradigm of TBTF.


The Wall Street Journal, (the nation's real newspaper of record, IMHO) addresses the difficulties of my plan. But at least it shows that it is being considered.

From a legal perspective, there is no mechanism to force a country out of the currency area, European Central Bank legal counsel Phoebus Athanassiou argued in a December 2009 working paper. And while the Lisbon Treaty introduced a means for states voluntarily to withdraw from the European Union, it was silent on leaving the euro. Ultimately, that means the only way a country could leave the euro would be to quit the EU, too, according to Mr. Athanassiou. That raises the stakes far higher, since it would affect the rights and obligations of citizens and companies.

Practically, too, leaving the euro would be extremely difficult. Beyond the huge logistical problems in introducing a new currency and untangling the national central bank from the Euro system, a euro exit followed by a devaluation would likely leave a country with a mountain of unserviceable euro-denominated debt, leading to major legal wrangles, mass personal bankruptcies and huge losses for creditors.

Doesn't change my position, but it does show what it would take. Exit question, will the Greeks themselves decide this their best option?

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