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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.
To the case, the motivations behind Paul Krugman's call to a break of 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.
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
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.
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.
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;
the EU institutions would face great difficulties to deal with the pace of events.
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;
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;
Most folk have become unemployed, or otherwise have lost a real salary.
Outside, most other Eurozone members have had to impose some sort of capital controls too;
Day Three - Economic paralysis Most economic activity is gone.
Most economic activity is gone.
Internally most companies are now insolvent,
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.
Fresh fruits and vegetables start to disappear from store shelves;
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.
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.
- Jake Friends come and go. Enemies accumulate.
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
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
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
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
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
other redistribution policies are possible. That's also true within the euro.
That's also true within the euro.
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...
Yes, you'll have 18-24 months of rationing and quasi-wartime economy.
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
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.
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
if a state like Greece leaves the EU there wont be any short-term recovery.
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.
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.
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 best parallel I can draw is with what happened to Cuba and North Korea once the USSR collapsed.
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