bass ackwards
The problem with Greece and the Euro isn't that the fixed exchange rate is foiling Greece from devaluing its way back to prosperity, but rather that adopting the Euro (and the ECB rules) let Greece finance an incredible spending binge at artificially low rates.
If Greece had never joined the Eurozone, it NEVER would have been able to run up so much foreign debt.
Labels: behavioral economics, financial puzzles, fiscal policy
posted by Angus @ 4/30/2010 03:41:00 PM
9 Comments
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9 Comments:
Might greece be able to fake adjusting its exchange rate by dropping the VAT and raising income taxes?
iceland isnt in the EU and it had insane foreign debt both by it's major banks and by the state. I don't actually think there is much of a dif between the two, and I doubt people lending to the ice people's banks did either.
Hi Eric: thanks for your comment. It is strange to say I have an opinion about a fact, but my belief is that Iceland's government didn't run up debt and deficits anything like Greece's. It is true that Icelandic banks spectacularly collapsed leaving a lot of foreigners holding the bag, but I don't see a close parallel to Greece here.
I am willing to say that I easily could be wrong though.
You're quite right - too much cheap debt caused this problem. This means that the obvious solution is for Greece to default, rather than racking up more underpriced debt from the IMF or Germany. After a default, fresh Greek government debt will be priced more accurately, since the bond markets will have learned the true risk.
I have a sort of "current debts are future taxes" view. I would bet a 12 pack of Dr. Pepper that Icelandic banks were viewed as state backed. This view allowed the majority of the crazy debt run ups.
Banks fail, state makes you whole, taxpayers or possibly IMF pay you sorta. The banks are simply an intermediate step for you having access to taxpayer funds directly.
Being in the EU complicated things but seeing non-EU countries all screwed up suggests that its fun side issue.
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