by new Guest Author: Bradley G. Lewis, Professor of Economics, Union College
A quote from Erin Davis, one of three participants in a Morningstar interview:
“Ultimately, I’m afraid that you’re right, that this won’t solve the problems in a really fundamental way. I think that they’re just extending Greece’s payout schedule, but the real underlying problem isn’t a liquidity problem. It’s not that Greece doesn’t have enough money to pay the debt right now. The problem is that Greece is never going to be able to repay this debt.
“So, ultimately, I think that the EU and the debtholders are going to become tired of extending the bonds, and that Greece is going to have to pay market rates eventually, and then, when that happens, it might be two or three years from now, but then, Greece is going to default.”
She goes on to say that the biggest holder of Greek debt is National Bank of Greece, with 13.2 billion euros. The theory in the video is that two or three years will be enough for other banks in Europe to get their houses in order, etc. So why don’t we just analyze the situation as follows, taking their logic as correct:
1. It’s a foregone conclusion that the austerity program will never help Greece. The bigger German, French (and maybe Dutch) institutions will have time to prepare themselves. In the meantime, the austerity program will likely result in northern European institutions getting their hands on key Greek assets that they can use to get an income stream from the Greek people. There’s nothing in the taxes and cutbacks that are likely to restart the Greek economy unless you assume that wages and prices will be cut so much that everything in Greece will become a bargain for everyone else. And in that case, a deflation, there will be enormous problems for all Greek debtors.
2. So why not the simple solution? If Greece pulls out of the euro and restarts its own currency, it can bail out its own banks with its own sovereign fiat money, making whatever exchange for euros that it wants to, and default on the northern Europeans. The EU could impose various sanctions, but in current circumstances the Greeks are likely to have plenty of potential suppliers and, if their vacations and goods become cheaper, at least some potential buyers.
Cynical, perhaps, but no more cynical than the game the rest of the EU is playing to be sure their banks don’t have a problem and that they end up being able to own significant parts of Greece as if it were a colony.
Watch the video of the interview below.
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Brad Lewis is Professor of Economics at Union College in Schenectady, NY, where he teaches courses in financial markets and institutions, international trade and finance, monetary economics, and urban redevelopment. He has also held senior-level visiting positions for a term or more at Carleton College and Skidmore College in the United States and at Kansai Gaidai University in Japan. He is a long-time member of and has occasionally co-chaired the Columbia University Seminar in Economic History and is Vice Chair of the Schenectady (N.Y.) Metroplex Development Authority.