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How to go forward with the euro?
800 years on sovereign debt
Serial default remains the norm; major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors. We also find that high inflation, currency crashes, and debasements often go hand-in-hand with default. Last, but not least, we find that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises.
Some Q&A on EU debt 2/3
Such banks, in the United States and Europe, can therefore borrow more cheaply and have an incentive to take on a great deal of risk — by lending, for instance, to governments and individuals with high debt levels already. This increases the chances of big macroeconomic crises going forward.
The cost of default
While economic models often assume that policymakers have the incentive to default too early or too often, in the real world politicians and bureaucrats go to a great length to postpone what seems to be an unavoidable default. In the case of Argentina, for instance, even Wall Street bankers had to persuade the policymaking authorities to accept reality and initiate a debt restructuring (Blustein 2005).
Under both types of exchange rate regime, the nominal domestic money supply M is exogenous, but for different reasons. Under flexible exchange rates, the nominal money supply is completely under the control of the central bank. But under fixed exchange rates, the money supply in the short run (at a given point in time) is fixed based on past international money flows, while as the economy evolves over time these international flows cause future points in time to inherit higher or lower (but pre-determined) values of the money supply.
Mundell-Fleming model
or to leave euro?
In effect, the consensus that Greece will end up defaulting is probably too optimistic . I’m growing increasingly convinced that Greece will end up leaving the euro, too.
That being said, it enables to get over this crisis but what happen next? Southern europe social contacts won't change anytime soon. And the seeds of the next crisis are there. by May 11
jeason, agree. Or the ECB runs inflation higher to make the greek relative desinflation more socially acceptable. by May 11
Yet if you look at many discussions of the euro crisis, they simply ignore the adjustment issue. Not to especially bash Marco Pagano , but how can you write a whole essay on the euro’s troubles without so much as mentioning the problem of getting relative costs and prices in line? It’s tempting to psychoanalyze here — to note that if you pretend that it’s all about fiscal profligacy, the problem seems solvable with a bit more discipline, but if you admit that the original optimum currency area issues are key to the situation, you wonder whether the common currency really makes sense.
Ignoring The Elephant In the Euro - Paul Krugman Blog - NYTimes.
That got the financial markets to become even more worried about the euro.
... an empty shell
Exit plan for this crisis
I like their plan. I would add one element to it: increase Eurozone inflation. This will make it easier for south countries to achieve the relative deflation they need vs. northern europe. by May 11
It had 7 fat years after the creation of the euro, experiencing large capital inflows and relatively high inflation. Now the bubble has burst, government revenue has collapsed, and pain looms.
Je sais, je sais Laetsgo. De toute façon les salaires ne sont et ne seront jamais ultra-flexible. Ceci dit le point là est de montrer le coût de l'euro. Une dévaluation est une forme de baisse de salaire sur les produits importés mais elle a l'avantage de ne pas y ressembler. by May 20
Ben voyons ! Puisqu'on ne peut pas dévaluer, baissons les salaires ! c'est qd même simple ! by May 20
Or a EU fund could play this role. But how to immunize it from politicians influence? by May 12
Maybe good academic idea but how realistic is it for politicians to accept it? by May 12
The Economist is right but totally unrealistic. Economic policies don't drive social contracts. It's the opposite. Social contracts are the result of history. You can't throw history away... by May 11
Volcker: "Euro ‘Disintegration’ Risk"
TheEconomist : euro and the future of Europe
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