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Paul Krugman was in Lisbon last week to receive three honoris causa PhD and openly advise Greece to leave the Economic and Monetary Union, something taken as a smooth advice to Portugal in the same direction. This is something that can only be accomplished by using the Lisbon Treaty mechanism to leave the EU.

False. One can simply print scrip, accept it in payment for taxes, and pass laws obviating all debts in the former legal tender.

To the case, the motivations behind Paul Krugman's call to a break of the EU

He is not. He is calling for breaking the Eurozone, which is not the same as breaking the EU.

There have been many cases of countries defaulting on external creditors and/or experiencing hyperinflation; there are some folk swift in making comparisons with previous cases to defend particular views. The reality is that no country ever left a monetary union like the Eurozone, after an exceptional period of 25 years of economic transformation towards the tertiary sector and at a time when oil prices are at 90 €/b.

Translation: No historical circumstance precisely matches current circumstance, so I'll invent an arbitrary set of criteria based on personal hobby horses more than underlying economic analysis to justify disregarding the overwhelming historical experience.

Following is a ran down of how things could develop in a smaller Eurozone state that decides to leave the EU.

Day One - Run on the Banks

Already happening. Stopping it is actually more feasible when one abandons silly notions like money mobility and intra-EU interbank obligations, and moves to explicit hard currency rationing.

Further, a Eurozone exit means that the sovereign can back domestic depository functions with its unlimited ability to print its own currency. So actually, leaving the common currency enhances, not diminishes, the tool available to deal with the domestic banks.

To this most economic analysts are arriving too. Facing the hypothesis of a devaluation of their savings, citizens try to get their money out of the bank or out of the country, into a currency insulated from the downward spiral, inevitably the Euro itself.

So what? The government has no obligation to guarantee risk-free real return on people's savings.

Things like this happened in Argentina and Mexico, and notably last year in Iran. By the end of the day capital controls have have to be fully re-established, most banks are forced to close doors and whatever value the government fixed the new currency on is now irrelevant.

The government does not fix the value of the new currency. That's the whole point of leaving a currency union. There is no reason to leave the union and then re-establish a peg. That's just silly.

If this happened in Greece, for instance, it would spread the same day to Portugal, or vice-versa. Ireland would be the next in line, then Spain and after Italy;

Again, so what?

the EU institutions would face great difficulties to deal with the pace of events.

The EU institutions "faced great difficulty in dealing with the pace of events" two years ago. Today they are not facing any great difficulty, because they are not dealing with the events that actually unfold, preferring to retreat to more comfortable fantasies.

Day Two - Bankruptcy tsunami

The following consequence of the re-introduction of an old currency is a massive bankruptcy. Most banks and companies have now assets denominated in the new currency, which lost the largest part of its value, but are indebted to foreign banks in Euros;


No. Part of converting to a new currency is to convert all debts resolved under domestic law or owed by debtors living under domestic jurisdiction to the new currency. Unilaterally, and at some fictitious exchange rate.

Most folk have become unemployed, or otherwise have lost a real salary.

Yes, that happened two years ago.

Outside, most other Eurozone members have had to impose some sort of capital controls too;

Yes. When Germany employs protectionist wage dumping, other countries must employ protectionist capital controls. This is a consequence of German protectionism, not of a Greek defense against that protectionism.

Day Three - Economic paralysis

Most economic activity is gone.


That happened six months ago.

Internally most companies are now insolvent,

No, internally all companies are solvent, because their debt is inflated and devalued away overnight.

and from abroad no one is willing to negotiate while the new currency doesn't stabilise. Capital controls themselves impose a serious barrier on foreign trade that can't be overcome fast enough. The break away state understands that it is now an island, and an isolated one.

False. Foreign trade remains perfectly possible, but only on a balanced budget basis. Hard currency must be rationed, of course, and so must certain essential imports such as fuel. But this is already the case, and has been the case for some months now.

Fresh fruits and vegetables start to disappear from store shelves;

Yes, you'll have 18-24 months of rationing and quasi-wartime economy.

Greece has been living under a quasi-wartime economy for 24 months already. If they had gone full Argentina the second it became clear that Germany would not print all the money the Eurozone needed to inflate away the unsustainable debts, they would be through the crisis already, and they would have suffered less in the process than they already have, nevermind what is to come.

If you think something like isn't possible consider that late last year, in the wake of the creditor haircut and the aborted referendum, Greece was only being able to get petroleum from Iran, a country living similar foreign confidence issues.

You assume that the exit happens on someone else's time table. Which it only does if Greece does not make it happen on their own time table. If it happens on Greece's time table, they will be able to institute wartime rationing of essentials.

Capital controls introduced in advance, curfew, rationing, all can help avoid this worst case scenario. But none of it is good, more than that, none of it would leave the break away state better than in the EU.

This is simply false, unless the EU embarks on a massive policy of inflation and public spending, which the EU will not do.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:31:22 AM EST
Or you could just read what Drew and Mig wrote, which I clearly hadn't before I fisked it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:37:05 AM EST
[ Parent ]
Third time's a charm.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:39:48 AM EST
[ Parent ]
other redistribution policies are possible.

That's also true within the euro. It is possible to have policies causing both public and private sector surpluses in intra-deficit countries, they're just not very bank-friendly or business-friendly.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 11:17:31 AM EST
[ Parent ]
You're ignoring the intra-EU cross-border redistribution problem, the infamous fiscal transfers that are the only way of sustaining persistent intra-EU trade balances. The issue which all the serious people keep running away from.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:25:00 PM EST
[ Parent ]
I'm not ignoring it, I'm saying it should have been solved, as it could have been, through private default.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 06:56:08 PM EST
[ Parent ]
Given that it wasn't solved and it continues to not be solved and it continues to grow and now, with the breakdown of the interbank lending system, it shows up in internal Eurosystem central bank balances... I think we have a problem.

But never mind, if you think the way to solve a balance of trade imbalance is serial private default once every 10 years or so...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:00:37 PM EST
[ Parent ]
It just needs to happen once to make the problem much smaller for a much longer time the next time round - i.e. vendor finance because harder to find, and German exports become less attractive.

But basically we still get to the point that growth in some parts of the eurozone was based on unsustainable debt-funded consumption.

We know how to do debt-funded investment (EINB without the need for national co-financing, or not as much), and we know how to make debt funding of consumption painful for the lenders.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:09:47 PM EST
[ Parent ]
But basically we still get to the point that growth in some parts of the eurozone was based on unsustainable debt-funded consumption.
You conveniently gloss over the fact that the Eurozone's institutional makeup restricts public sector debt but leaves private sector debt unrestricted on the premise that the market will provide. Evidently, not only is that legal framework nothing but condensed neoliberal ideology, but unrestricted risks will give rise to profit opportunities that will be exploited by economic agents. So private vendor finance of German exports fuelling a bubble of elephantine proportions was a plausibly predictable outcome of the Eurozone's own institutional construction. And nothing is being made to address that. They're doubling down on the dismantling of the public sector which was a predictable consequence of the Maastricht Treaty.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:23:28 PM EST
[ Parent ]
There is a simple solution to stupid private lending: bankrupcty (ie debt cancellation). Nothing in the European treaties prevented that solution.

And nothing prevented countries from regulating lending more stringently inside their borders. It's "anti-growth" so it usually doesn't happen, but that's the point, isn't it? We can't seem to do the right thing if it costs us anything in the short term.

The grip of our financial world on our politicians (and minds) is what prevented that solution from happening.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:32:52 PM EST
[ Parent ]
It's "anti-growth" so it usually doesn't happen, but that's the point, isn't it?

You seem to forget that there are real people whose livelihoods, why, whose lives, are being ground to a bloody pulp because of "anti-growth" policies currently being imposed by the EU.

If what it takes for people to be able to not starve is nominal GDP growth and some inflation, fuck, why isn't it happening? Why do we have pro-growth policies only when it benefits the oligarchy?

Because sure as hell being "anti-growth" doesn't appear to be a political negative these days.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:37:02 PM EST
[ Parent ]
other redistribution policies are possible.

That's also true within the euro.


Within the Euro you need a qualified majority. Outside the Euro, you can impose such redistribution unilaterally.

The question comes down to whether the state or federal level in Europe is the more effective economic planning unit. And since the federal level has taken a twenty-five-year ride on the "hard money" crazy train, well...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:17:14 PM EST
[ Parent ]
Yes, you'll have 18-24 months of rationing and quasi-wartime economy.


Hi Jake, your detailed rebate echoes most of the concerns expressed so far in the fountain of comments this post has spawn. This particular assertion is the most problematic to me, if a state like Greece leaves the EU there wont be any short-term recovery. Moreover, things like a long term shortage of fuels can perform social transformations that may not even be possible to reverse.

The lack of internal production on the primary and secondary sectors, and the cut off from external markets would impose problems that couldn't be solved either easily or fast. True, a lot can be done at the community level, but the impoverishment would still be huge. The best parallel I can draw is with what happened to Cuba and North Korea once the USSR collapsed. Cuba managed to reform itself but it took about a decade; North Korea never really came back.

luis_de_sousa@mastodon.social
by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Sat Mar 17th, 2012 at 02:18:00 PM EST
[ Parent ]
if a state like Greece leaves the EU there wont be any short-term recovery

Whereas there will be one if it stays?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 02:19:37 PM EST
[ Parent ]
Cuba managed to reform itself but it took about a decade; North Korea never really came back.

I must strenously insist this is wrong. Greece and Portugal are, all their weak sides granted, still modern capitalist economies full of hard-working entrepenurial innovative people (as long as they have jobs), who have created excellent business before and will do so again, as soon as the EU allows them too.

Cuba and North Korea on the other hand, are worhless commie dictatorships, shackling their own people and preventing them from initiating any kind of enterprise. These countries would not be able to export anything even if they devalued their currencies to Hell and back. I mean, useless Cuba, famous for sugarcane, dirt poor labourers and oil shortages, even managed to entirely miss out on the sugarecane ethanol boom!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 04:21:44 PM EST
[ Parent ]
Greece and Portugal are, all their weak sides granted, still modern capitalist economies full of hard-working entrepenurial innovative people (as long as they have jobs), who have created excellent business before and will do so again, as soon as the EU allows them to[].

That is rather the point, isn't it? The EU is part of the solution only insofar as it can stop being the problem.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 05:55:21 PM EST
[ Parent ]
It sure is. We've seen the enemy, and he is us.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 06:30:54 PM EST
[ Parent ]
Not everyone appears to agree, yet.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:49:26 PM EST
[ Parent ]
if a state like Greece leaves the EU there wont be any short-term recovery.

If Greece fails to leave the Euro, there will be no state of Greece that can experience a recovery. Long or short term.

We're two years late and twenty percentage points of unemployment short for the "keep the Euro" side of this discussion to have any rational basis in observable reality.

Moreover, things like a long term shortage of fuels can perform social transformations that may not even be possible to reverse.

Yeah, being a structural trade deficit country with a strategic import dependency on food or fuel sucks.

Now please tell me how allowing the ECB to destroy your society, government and economy will make that better?

The lack of internal production on the primary and secondary sectors, and the cut off from external markets would impose problems that couldn't be solved either easily or fast.

You keep talking about this mythical state of being "cut off from external markets" as if it had been actually observed anywhere in history as a result of a sovereign default and de-pegging.

It hasn't. Stop scaring people with monsters under the bed. It's fundamentally dishonest.

True, a lot can be done at the community level, but the impoverishment would still be huge.

The improverishment is already huge.

The best parallel I can draw is with what happened to Cuba and North Korea once the USSR collapsed.

You need to make an actual positive case for that before I'll even bother pointing out all the obvious reasons that comparison is horseshit. With plenty of historical counterexamples.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:28:10 PM EST
[ Parent ]

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