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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

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