Thursday, December 11, 2008

Greece, and some thoughts

Ambrose Evans Pritchard has written a pretty doomy scenario surrounding the Greek rioting - which has continued today without abatement.

His thesis is that the economy is hamstrung by its membership of the Euro zone, a membership that was fraudulent due to statistical slieght of hand to allow Greece Euro entry.

Without wanting to rehearse all the pros and cons of euro membership yet again, or debate whether EMU is a "optimal currency area", there is obviously a problem for countries like Greece that were let into EMU for political reasons before their economies had been reformed enough to cope with the rigours of euro life - over the long run.

In the case of Greece, of course, Athens was found guilty by Eurostat of committing "statistical achemy" to get into the system - ie, they lied about their deficits.

Be that as it may. Greece's euro membership has now led to a warped economy. The current account deficit is 15pc of GDP, the eurozone's highest by far. Indeed, the deficit ($53bn) is the sixth biggest in the world in absolute terms -- quite a feat for a country of 11m people.

I asked a Greek colleague whether this was a reasonable overview of the situation back home. His response,
Yea, I'm sure he has his facts right ... but Greece cannot afford the political costs of leaving the Euro ... the people really will revolt if they have to go through all the inflationary changeover costs again .... and the EU cannot afford the political costs of bailing Greece out like Hungary (because then every one will ask for a bailout). Greece is stuck with the Euro and the Eurozone is stuck with Greece.

Do you have a paddle? Cos we're up shit creek and we don't have one
However he did want to point out one salient fact, one that by extension fills me with some foreboding,
"Statistical alchemy", says Ambrose.

True, but only becuase everyone else did the same thing. Especially in the Mediterranean. No government was prepared to stay out when its neighbours were going in.

If the Maastricht rules had been applied to the letter of the law, only Luxembourg would have qualified at the outset.

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