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Should Greece present the ECB with an ultimatum, will the ECB and the Commission take it lying down?

No, they will probably refuse. That's why this recommendation would have been impossible half a year ago: Back then, it still looked like the costs to Greece of leaving the € were larger than the costs of playing ball with the deficit errorists. But unless things begin changing posthaste, leaving the € will be preferable to continuing to appease the deficit errorists.

Is there no punitive countermeasure they can resort to?

They have a variety of creative ways to screw Greece over. They can refuse to carry Greek bonds, thus leaving Greece at the mercy of the markets. But if Greece quits the €, Greece can tell the markets to go and commit unnatural acts with farm animals. They can refuse to release EU funds for Greece (which is a net recipient). They can sue Greece in the European courts (but that takes years and years). Greece will lose prestige, standing and political capital in Bruxelles (but political capital only matters if you have an actual policy to push in the first place...). And a variety of other innovative forms of mean-spiritedness.

But the point of the Greek situation is that, short of sending a naval task force or ejecting you from the EU altogether and putting up punitive tariffs, they can't do anything worse to you than they already are doing with this AusterityTM crap. Having your back firmly pressed against the wall is enormously liberating in terms of policy options.

Now, it's important to note that leaving the € won't make the pain go away completely. Following a default, it will take a year or two before Greece is able to borrow at anything resembling reasonable rates in the international money markets. What leaving the € will do for Greece is restore Greek government control of the domestic money markets. That means that domestic Greek economic activity can be funded at reasonable interest rates, but hard currency will have to be rationed, presumably by explicit import quotas and capital controls, as well as activist ForEx policies to rapidly build foreign currency reserves.

The question you should be asking yourselves is whether the inability to import Siemens and Samsung for the next two years is better or worse than AusterityTM.

Isn't this really an extortion by the ECB/EC?

"Extortion" is such a crude word. I believe that the internationally recognised term is "foreign policy."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 09:28:14 AM EST
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