FT Video Interview on Greece and Europe

Currency in Crisis

Here is the link to a video interview I did earlier this week with John Auther's of the Financial Times.  Authers' pens the Long View column at the FT.   The interview gave me an opportunity to highlight my some what non-consensus views on Greece.  

First and foremost, contrary to what many observers have suggested and what the German finance minister encouraged, the election is not a referendum on Greece's euro membership.  Greece chose to join years ago and the polls show an overwhelming majority favor keeping the euro.  It is not the binary situation some have suggested.

The election does mark the beginning of a new negotiation period.  Regardless of the election outcome, the old memorandum of understanding (MOU) needs to be reworked, given the horrible economic and financial developments in recent months.  

The real issue is what is the role of that previous memorandum.  The New Democracy and Socialists essentially say that the current MOU can serve the basis of a new agreement.  Syriza in effect says not.  A total new approach is needed.  

What follows from this is that Greece is not about to unilaterally leave the monetary union.  If it is to leave it has to be pushed out.  Although there is no formal mechanism to eject Greece, the ECB can so squeeze Greece by 1) denying Greek banks access to its lending facilities and 2) bar Greece from the Target 2, European cross border settlement system.  

That would be like denying a person oxygen.  Greece would be forced to supplement its money supply.  This could take on a number of different forms, such as a parallel currency (such as Argentina did) or create IOUs (like the former governor of Calilfornia did).  The point is the ECB could force Greece to chose between creating new money or risk social disorder and revert to barter. 

Another point that is worth noting is that even if Greece were to leave the union, there are high direct and indirect costs to Europe and to Greece itself.  There is no panacea or free ride.  Greece did not cause the European debt crisis.  It reflected it.  The resolution of the Greek question will not in of itself address the debt crisis.  It can offer Spain, for example, only the briefest of respites.