What I've just described is actually one of the weaknesses of the EU (as is widely recognized); it's an economic union without political union, which means that the EU as a body has no real way of enforcing its rules other than economic sanction. Greece didn't want to leave the EU (for understandable reasons) and had therefore to accept the bailout terms offered, but an independent Greece could simply have devalued the drachma into newsprint and walked away. (Yes, this would have destabilized the Greek economy as well, but the EU didn't want to take that hit, which is why they eventually came up with a semi-reasonable deal.)The problem for Greece, and a likely problem for anyone else in such a situation, is that had they left, devaluing the new drachma (or whatever they named their new currency) wouldn't help them one bit.
This is exactly wrong.
Their debts were in Euros.
Greece -- that is, our hypothetical, independent Greece -- would be a sovereign country. As such, it can unilaterally restructure its debt to be in anything it likes, including nothing at all (that's called "repudiating debt," and it happens more that you think, especially in the pre-globalization world).
Anything they owed prior to independence would not have to be paid back in anything at all. That's how Argentina got out of the 2001 debt crisis -- they simply told the creditors to pound sand.
Now, you're right that any new imports or new loans would need to be paid for under different terms. Greece can arbitrarily rewrite the terms of existing loans or contracts, but people will notice and are likely to demand greater security in any new ones. Again, Argentina provides an instructive example -- after the 2001 default, they couldn't get back into the international credit market until 2005, and that was when they had to submit to the "these bonds will be governed under US law" terms.
They might forgive the leadership if they manage to negotiate more-favorable trade agreements that make up for the loss.Er.... more favorable than what?
Right now, there are no trade barriers between the UK and the rest of the EU. The UK already has special dispensations from much of the EU's general regulations, enough to make the them the least-regulated market in Europe. Short of the EU agreeing actively to subsidize British exports to the rest of the EU, I'm not sure what kind of trade agreement could even be suggested.
The issue has never been trade agreements, as numerous political commentators have pointed out. The issue should never have been balance of payments, either, as both BoJo and Farage admitted within hours of winning -- the UK already strongly underpays for the privilege of EU membership.
The one semi-legitimate issue is immigration and the free movement of labor. The British enjoy a high standard of living and the high wages that go along with it, which means that every Pole and Greek who can drive a lorry or pull a pint -- excuse me, half-liter -- would love to move to the UK and get paid in real money. I can see where the English drivers would object to that. But I also think that free movement of labor is one of the hills that the EU is willing to die on.
Exactly : UK had the best deal of all EU countries, period. If it goes through the Brexit, it can only get a worse one. It's not that other countries will ge out of their way to punish UK, but they can't promote exit by giving away a too generous offer (what's the point of staying in if you can get a better treatment outside ?).
Our british friends will correct me if needed, but it seems that this mess came from plain old strife among the tories :
1) during last elections, Cameron promised a referendum to appear as even more british than his conservative opponents (seemed inocuous at the time, as he was the underdog) ;
2) he got elected and felt he had to uphold said promise;
3) Bojo saw an opportunity to undercut Cameron and joined the Leave crowd, as a way to claim control of the tories;
4) surprising even himself, he won ! He swiflty leave for cricket, and start to plan something, having no idea how to deliver.
5) Chaos ensues, tories and Labour both implode, leaving UK leaderless. Surfing on a xenophobic wave (attacks on polish people seems to be rising), Nigel Farage get elected emperor of the Republic of England and Wales (not sure about the last one, but heh ? Who knows ?)
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Populism and Populists are fine.
It's demagoguery and demagogues that are the problem.
My bad
I used Populists in the French meaning where it is almost synonymous with demagogues
We use the word Populaire for positive common people movements
Sorry for the misunderstanding and my most sincere apologies to any I have offended with my mistaken choice of words
Though of note - they both seem like two sides of the same coin to me, and different people vary in what they call them.
If you think it's reasonable then it's populism, and if you think it's horrible then it's demagoguery.
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What I've just described is actually one of the weaknesses of the EU (as is widely recognized); it's an economic union without political union, which means that the EU as a body has no real way of enforcing its rules other than economic sanction. Greece didn't want to leave the EU (for understandable reasons) and had therefore to accept the bailout terms offered, but an independent Greece could simply have devalued the drachma into newsprint and walked away. (Yes, this would have destabilized the Greek economy as well, but the EU didn't want to take that hit, which is why they eventually came up with a semi-reasonable deal.)The problem for Greece, and a likely problem for anyone else in such a situation, is that had they left, devaluing the new drachma (or whatever they named their new currency) wouldn't help them one bit.This is exactly wrong.
Their debts were in Euros.Greece -- that is, our hypothetical, independent Greece -- would be a sovereign country. As such, it can unilaterally restructure its debt to be in anything it likes, including nothing at all (that's called "repudiating debt," and it happens more that you think, especially in the pre-globalization world).
Anything they owed prior to independence would not have to be paid back in anything at all. That's how Argentina got out of the 2001 debt crisis -- they simply told the creditors to pound sand.
Now, you're right that any new imports or new loans would need to be paid for under different terms. Greece can arbitrarily rewrite the terms of existing loans or contracts, but people will notice and are likely to demand greater security in any new ones. Again, Argentina provides an instructive example -- after the 2001 default, they couldn't get back into the international credit market until 2005, and that was when they had to submit to the "these bonds will be governed under US law" terms.
True - but that's not really dependent upon devaluing their currency, and said devaluing wouldn't need to be done to do it. (Though it would undoubtedly be a side-effect.) That's basically a country's version of going bankrupt.
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The problem for Greece, and a likely problem for anyone else in such a situation, is that had they left, devaluing the new drachma (or whatever they named their new currency) wouldn't help them one bit. Their debts were in Euros. Anything they owed externally would need to be paid back in Euros.
Well, it would still help. Consider tourism. With a devalued currency it becomes much cheaper for people to visit Greece. That, in turn, would result in increased tourism bringing money in to the economy. Similarly, goods manufactured in Greece and sold in 'new-drachmas' would be cheaper than similar goods manufactured and sold under more robust currencies... increasing exports.
So while a devalued currency wouldn't help with debts directly, the indirect effects could well be very significant.
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True - but that's not really dependent upon devaluing their currency, and said devaluing wouldn't need to be done to do it. (Though it would undoubtedly be a side-effect.) That's basically a country's version of going bankrupt.What I've just described is actually one of the weaknesses of the EU (as is widely recognized); it's an economic union without political union, which means that the EU as a body has no real way of enforcing its rules other than economic sanction. Greece didn't want to leave the EU (for understandable reasons) and had therefore to accept the bailout terms offered, but an independent Greece could simply have devalued the drachma into newsprint and walked away. (Yes, this would have destabilized the Greek economy as well, but the EU didn't want to take that hit, which is why they eventually came up with a semi-reasonable deal.)The problem for Greece, and a likely problem for anyone else in such a situation, is that had they left, devaluing the new drachma (or whatever they named their new currency) wouldn't help them one bit.This is exactly wrong.
Their debts were in Euros.Greece -- that is, our hypothetical, independent Greece -- would be a sovereign country. As such, it can unilaterally restructure its debt to be in anything it likes, including nothing at all (that's called "repudiating debt," and it happens more that you think, especially in the pre-globalization world).
Anything they owed prior to independence would not have to be paid back in anything at all. That's how Argentina got out of the 2001 debt crisis -- they simply told the creditors to pound sand.
Now, you're right that any new imports or new loans would need to be paid for under different terms. Greece can arbitrarily rewrite the terms of existing loans or contracts, but people will notice and are likely to demand greater security in any new ones. Again, Argentina provides an instructive example -- after the 2001 default, they couldn't get back into the international credit market until 2005, and that was when they had to submit to the "these bonds will be governed under US law" terms.
Well, the devaluation is (one of) the immediate effects of this kind of move, typically.
Argentina is actually a very nice place, as I understand it (never having been there). And I have been to Greece, and I can attest to its niceosity. But if you think I'd be dumb enough to visit Greece right after they declared independence from the EU and put their entire economy into the crapper..... wait, hotel rooms cost how much? And it's right on the beach? Hmmmm.....
The devaluation is basically the market's attempt to deal with the fact that the newly independent Greece would need hard currency a lot more badly than the rest of the world needs drachmae. Greek cars still need gasoline, which means US dollars, but I don't need Greek beaches (or Greek cucumbers). But if the Greek beaches are cheap enough, or the cucumbers are cheap enough, I might be willing to swap some of my dollars for lots and lots of cucumbers on a very nice beach.
A newly independent Greece would have a huge supply of drachmae and a huge demand for dollars, so the exchange rate would drop to next-to-nothing. And that's the exit path for a bankrupt country. That was the exit path for Argentina, and that would have been the exit path for Greece if they had gone the independence route.
A problem with the EU is that the shared currency prevents that. If your economy is doing well, then a shared currency is a very good thing as it reduces transaction costs and makes it easier to buy and sell things at good prices. Wider market for your goods, and more suppliers bidding for the things you need. But when Greece didn't have any money to buy things, and wasn't able to sell things cheaply enough, that's when trouble strikes.
And that's also why debt repudiation exists in the first place. Prior to about 1970, no one in their right mind would have expected Greece either to borrow in hard currency or to agree to being locked in to payment in hard currency. Instead, interest rates helped control currency flow; you got 3% buying US bonds (which were offered as the definition of "risk free") but 8% buying Ruritanian ones, because there was adjudged a roughly 5% chance that Ruritania would simply go through what CLH correctly identified as the equivalent of bankruptcy and walk away from the bonds. If the Ruritanian economy falls further, the bond prices will rise even further as foreign investment dries up, weakening the currency, until eventually the currency is weak enough that it's worth it to invest again.
It's actually a very neat self-regulating mechanism.
The EU has managed to break this system by locking in half, but only half, of the regulatory mechanism. Greece is locked into paying a nominal amount of debt in a hard currency that can't devalue, but at the same time is also locked into paying market rates for its debt. This means that if the economy falters, interest rates rise, and so does the actual as well as the nominal debt. But since the currency can't float, and since Greece can't unilaterally adjust its debt, there's no way for the Greek economy to make itself more appealing to the market and draw in more money at a lower level. Essentially the Euro serves as a rachet.
And that's "optimum currency area" theory in a nutshell.
There are certainly benefits. Assuming the devaluation doesn't simply lead to inflation. Which since they still need to import things like energy, isn't at all clear.
Um, you're still not understanding. Of course the devaluation leads to inflation -- that's in fact the point, and the primary benefit.
Prices in drachma are forced to rise, but because the drachma itself is falling, prices in hard currency are lower. The stability point is somewhere in the middle.
The only reason you'd even consider doing this this in the first place is because your currency is overvalued. The whole issue of a debt crisis happens when you have too few goods/services in your economy to support the currency demands of a debt.
Too much currency chasing too few goods? That's a recipe for inflation.
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Yeah - I'm with you Orfamay. Basically - you run into all sorts of trouble when you have a unified currency without a unified economic policy.
At least without going back to a gold standard or something else of intrinsic value. (I'm talking real gold standard - not 1940's 'gold standard' where it was illegal to own gold.) Back in the day virtually everyone took Spanish coin because it was a gold coin known for consistent gold weight & purity.
Argentina "defaulted", but has been dealing with court cases ever since and is, I believe, currently in an agreement to repay the whole debt. That's not quite telling the creditors to pound sand. To get that deal in 2005, they had to not only agree that those new loans would be governed by US courts, but to repay most of the old ones and that the old ones would be as well.
If those original loans had been denominated in Argentinian currency, there wouldn't be a legal case.
Again, you're missing something critical. There is/was only a legal case because Argentina accepted a legal case retroactively as part of the 2005 deal (and then effed up the negotiations big time).
From 2001 to 2005, Argentina was in the clear for the pre-2001 debt. A whole bunch of people held paper, but that paper was widely considered to be valueless. With the single notable exception that it might be used against Argentina as a bargaining chip.
Come 2005, Argentina decided it needed foreign capital, and the same people who it needed capital from were the same ones that held (some of) the paper. So those people basically said "well, we're not going to lend you any money UNLESS...."
Actually, this is a trick that collection agencies in the States use as well. They buy valueless, and in many case unenforceable, consumer debt and then try to "persuade" the people to pay the debt despite the fact that they have no obligation to.
Argentina may have been scammed. More charitably, they may have done their due diligence and figured that immediate access to the credit markets was worth the debt burden of the old and unenforceable debt. That doesn't change the legality of the original repudiation.
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At least without going back to a gold standard or something else of intrinsic value.
That's a good one. Gold is actually one of the worst things to base a currency on, as it has no intrinsic value and also no relationship either to the economy or to the balance of payments.
In broad terms, international payments are all barter. American tourists spend $10 million (US) in Ruritania each year, Ruritania sells 100 million (bindersnichi worth of) kumquats to the US each year, and it all sorts itself out because ten bindersnichi is worth about a dollar.
If for some reason Ruritania finds itself in trouble, it devalues the currency (or the market does it automatically); the hotel that cost $100 now costs $80 and so American tourists now spend only $9 million each year. But at the same time, Ruritanian kumquats are now cheaper and they can sell 130 million kumquats..... Essentially, they've renegotiated the barter terms from 10 kumquats to the dollar to closer to 15 kumquats to the dollar, giving us more kumquats.
The US doesn't want Ruritanian gold. It wants Ruritanian kumquats. And the last thing that Ruritania needs is a currency that doesn't let it lower prices on its kumquats.
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Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.
Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.
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Once upon a time, things worked like you imagine. You could default and get away with it. You just had to be self-sufficient enough not to need to deal in hard currency or at least not borrow any. The way the world is interconnected now and the way modern finance works, you need both. You need capital and you need trade.
If you just isolated yourself you could do it.
China did it back in the 40's. They owed a ton of $ (in gold) before they went communist. I think they actually paid back a few ounces on the pound (since we're talking gold) to British holders of the debt a few years ago actually as part of trade negotiations.
Though - in China's case it only screwed over the western nations and still sort of hung out with the soviets.
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At least without going back to a gold standard or something else of intrinsic value.That's a good one. Gold is actually one of the worst things to base a currency on, as it has no intrinsic value and also no relationship either to the economy or to the balance of payments.
It has an intrinsic value in that everyone knows it does. And no government can print more. And no - it doesn't have a relationship to the balance of payments. Not allowing govs to manipulate their own currency is arguably an advantage to having a gold standard.
The US doesn't want Ruritanian gold. It wants Ruritanian kumquats. And the last thing that Ruritania needs is a currency that doesn't let it lower prices on its kumquats.
The US would want gold too if it was of equal value. But no - such a system would prevent Ruritanian from devaluing their currency for the short-term trade gains. (Whether that's a good or bad thing is debatable. I do agree entirely that it would be different from the current system.)
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Once upon a time, things worked like you imagine. You could default and get away with it. You just had to be self-sufficient enough not to need to deal in hard currency or at least not borrow any. The way the world is interconnected now and the way modern finance works, you need both. You need capital and you need trade.
If you just isolated yourself you could do it.China did it back in the 40's. They owed a ton of $ (in gold) before they went communist. I think they actually paid back a few ounces on the pound (since we're talking gold) to British holders of the debt a few years ago actually as part of trade negotiations.
Though - in China's case it only screwed over the western nations and still sort of hung out with the soviets.
"Once upon a time".
And China back then was very isolated.
Sorry I wasn't clear. I meant that as an example of what you were talking about.
Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.
This has always been a massively overblown fear.
The United States of Europe, as a theoretical concept, is grounded in the idea that the European mainland is dominated by two principal powers, France and Germany, and that the continent cannot survive as long as those two powers are in competition with one another for land and resources. The first and second world wars resulted from that, along with the Franco-Prussian War and the Napoleonic Wars. After a century and a half of conflict, France and Germany found a way around the problem by sharing economic goals, getting rid of their borders and creating a shared currency (also, ditching fascism helped). Great for them. But of course there are a few other nations on the European continent other than those two who weren't happy with them working in lockstep for their own interest.
That is actually why Britain signed the Maastricht Treaty without going for a referendum (and that was massively controversial at the time), because the Conservative government under Major absolutely did not want a Europe dominated by the Paris-Berlin axis (rubberstamped by Brussels and Luxembourg) with nothing to stop them doing whatever they wanted. And Britain was rather more successful than it's often been credited for at getting in there and making sure that not everything went their way.
Since 2008 Britain's power in the EU has actually grown: France elected Hollande, whose left-wing political viewpoints are completely incompatible with Merkel's pragmatic economics, and as a result France and Germany have gone through an ideological separation. Britain has stepped in, its economy has surged past that of France and the for the last few years it has done an excellent job of getting things done in Europe. Most notably, cutting the EU budget a few years ago during the height of the economic crisis. During the Paris/Berlin lockstep days, that'd have been impossible. But Britain made the argument and carried it. We've actually been helped by this by the new eastern European member states who likewise don't share the enthusiasm for a United States of Europe, most notably Poland.
Right now, there is far less chance of a United States of Europe ever coming into existence. Euroscepticism is rife across Europe, even in France and Italy, and is a small but influential force now in Germany. Britain had effectively won the argument on stopping the ever growing union. In fact, we really should have started redefining what the European Union should be: a trade alliance of nations with some common laws to enable trade and travel to be easier and an inner core of countries with the single currency (which, to be frank, is looking increasingly unworkable in the long run). And Britain's ability to define the EU and taking a leading role in it was only growing: under previous forecasts and remaining in the EU we would have overtaken Germany by 2030 at the latest as the primary economic power in the EU.
Of course, we've just thrown that possibility out of the pram.
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Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.
Huh, historically, quite the contrary. From the start, the common market was meant by Schumann and its other founders as a way to United Nations of Europe.
One of the big stumbling blocks is that UK and other countries had other ideas when they joined the club, and wished for a purely economic union. It's why EU got stuck in stasis between a trade union and a federation : Euro was meant as a way of pushing toward greater political integration, as a common currency would create the need for an economic common policy... which we still wait for.
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It has an intrinsic value in that everyone knows it does. And no government can print more. And no - it doesn't have a relationship to the balance of payments. Not allowing govs to manipulate their own currency is arguably an advantage to having a gold standard.At least without going back to a gold standard or something else of intrinsic value.That's a good one. Gold is actually one of the worst things to base a currency on, as it has no intrinsic value and also no relationship either to the economy or to the balance of payments.
Actually, no.
The gold standard creates a de-facto currency area of "the entire world, or at least that part of it that's still on the gold standard." That alone is enough to demonstrate that it's a bad idea. A lot of work has been done on optimal currency areas, in the past fifty or so years, and there are four major criteria that almost everyone agrees are a key part of the definition of an optimal currency area.
"The world" satisfies none of them.
There are a whole bunch of other reasons why the gold standard is a terrible idea, but in the context of "the EU is a bad idea because it locks economies together in an unhealthy way," the fact that the gold standard would lock even more economies together in an even more unhealthy way is enough for now.
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Huh, historically, quite the contrary. From the start, the common market was meant by Schumann and its other founders as a way to United Nations of Europe.Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.
That comparison won't help, because many people in the U.S. hold the same irrational "one world government" fears about the U.N.
The problem for Greece, and a likely problem for anyone else in such a situation, is that had they left, devaluing the new drachma (or whatever they named their new currency) wouldn't help them one bit. Their debts were in Euros. Anything they owed externally would need to be paid back in Euros.Well, it would still help. Consider tourism. With a devalued currency it becomes much cheaper for people to visit Greece. That, in turn, would result in increased tourism bringing money in to the economy. Similarly, goods manufactured in Greece and sold in 'new-drachmas' would be cheaper than similar goods manufactured and sold under more robust currencies... increasing exports.
So while a devalued currency wouldn't help with debts directly, the indirect effects could well be very significant.
The problem is the transition though. Regardless of what value was given to the new-drachma, it would surely plummet after that and continue plummeting for while.
The total number of drachma stays the same, assets valued in drachma stay valued at the same number, but their relative value compared to Euro's goes down.
The government can't tax based on the value of the Euro, it has to tax based on the value of the drachma. Someone who makes 100 drachma yesterday, still makes 100 drachma today and you're still taxing them the same percentage. Just when you turn around to pay the governments debts, the value of what's received in drachma is now worthless.
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Can't we just agree the concepts of money and economy are bad in and on themselves before the billions different points of view on the subject, nevermind after.
Sorry not in agreement with that either ;-)
This thread sure changes shape as fast as a protean
Yet it stays mostly interesting and educative
The problem is the transition though. Regardless of what value was given to the new-drachma, it would surely plummet after that and continue plummeting for while.
Actually, no. One of the tricks that the economists figured out is that if you devalue enough, you essentially produce a fire sale on your local currency and it will actually go up after a devaluation.
Let's say that the "right" value (obtained by detailed economic analysis involving two tarot decks, three cups of tea, and the entrails of a pigeon) is ten drachmae per Euro. As in, that "right" value undercuts your competitors enough that you would see a dramatic (sufficient) uptake in the amount of your exports. (This isn't that hard a calculation; McDonalds does it all the time when they're trying to figure out how to win a price war against Wendy's.)
The trick, then, is that you devalue to twelve drachmae per Euro. At this point, everyone notices that Greek goods are not merely cheap but an outright bargain and all sorts of economic vultures swoop in to buy underpriced cucumbers.
This, in turn, produces a huge influx of foreign currency, creating a strong demand for drachmae and a strong supply of hard currency, which stabilizes your currency and will even raise it slightly.
Can't we just agree the concepts of money and economy are bad in and on themselves.
Er, no. We can't.
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This thread sure changes shape as fast as a protean
Well, we are trying (collectively) to understand the consequences and implications of a Brexit. It would help us understand them if we knew what they actually were. One of the major issues with the referendum itself is the huge amount of misinformation thrown around by both sides, added to the ordinary common or garden variety of ignorance about economics that seems to plague most countries. (Actually, I've probably reversed cause and effect there. Oh, well.)
For example, I understand very well why people who themselves feel economically threatened would want to preserve any economic advantage they have. But just because you feel economically threatened by something doesn't mean that it's actually an economic threat -- sometimes the evil shadowy thing with tentacles in the corner is just a plate of calamari in a bad light. And sometimes economics can counterintuitive and the most obvious way to protect what is yours will actually cost you more.
About xenophobia and racism, the factors in this election "that dare not speak their name," we can't do much. If the reason someone voted to leave is because they don't want Poles in their neighborhood drinking vodka instead of whisky and because the Italians eat garlic in bed,.... well, pointing out that the Poles actually drink more beer than vodka probably wouldn't help.
The problem is the transition though. Regardless of what value was given to the new-drachma, it would surely plummet after that and continue plummeting for while.Actually, no. One of the tricks that the economists figured out is that if you devalue enough, you essentially produce a fire sale on your local currency and it will actually go up after a devaluation.
Let's say that the "right" value (obtained by detailed economic analysis involving two tarot decks, three cups of tea, and the entrails of a pigeon) is ten drachmae per Euro. As in, that "right" value undercuts your competitors enough that you would see a dramatic (sufficient) uptake in the amount of your exports. (This isn't that hard a calculation; McDonalds does it all the time when they're trying to figure out how to win a price war against Wendy's.)
The trick, then, is that you devalue to twelve drachmae per Euro. At this point, everyone notices that Greek goods are not merely cheap but an outright bargain and all sorts of economic vultures swoop in to buy underpriced cucumbers.
This, in turn, produces a huge influx of foreign currency, creating a strong demand for drachmae and a strong supply of hard currency, which stabilizes your currency and will even raise it slightly.
This is assuming that the Greece economy is healthy enough to support the trick. That a Grexit doesn't automatically devalue the very concept of doing business in Greece to the point that everyone pulls up stakes or just avoids it.
A separation of Greece from the EU and the Euro is going to hurt Greece in the short term. It would eventually recover to some degree, but when, and how much, is impossible to prognosticate.
If I'm a manufacturer looking to build a new production in Europe, a country that was so poorly run that it was essentially kicked out, is not an attractive option, no matter how little I have to pay my workers there. If I want cheap labor options, I can look further East to other EU countries that have less political turmoil, but are still way down on the cost of living scale.
The trick still doesn't prevent a Greek government collapse/bankruptcy and disorder in the streets. A couple months ago there were migrants on the verge of rioting. Last year locals were rioting. 2012 fringe political groups were rioting.
None of that is encouraging to tourism or investors. If those things persist or get worse, the value of the drachma would decline, were it Greece's currency. In theory, it's a way to lessen the blow of separating Greece from the EU, but doing that would only make Greece less stable and inherently open up risk to a plummeting drachma, regardless of how low you set it (barring truly ridiculously low initial offerings... which could turn the country into an actual fire sale).
This is assuming that the Greece economy is healthy enough to support the trick. That a Grexit doesn't automatically devalue the very concept of doing business in Greece to the point that everyone pulls up stakes or just avoids it.Actually, no. One of the tricks that the economists figured out is that if you devalue enough, you essentially produce a fire sale on your local currency and it will actually go up after a devaluation.
The problem is the transition though. Regardless of what value was given to the new-drachma, it would surely plummet after that and continue plummeting for while.
People dumb enough to think that way aren't typically given decision-making authority.
A separation of Greece from the EU and the Euro is going to hurt Greece in the short term.
Well, yeah, duh. The devaluation is a substantial part of the hurt. But the devaluation is also past at the point when you'd be making the decision to invest or not.
It would eventually recover to some degree, but when, and how much, is impossible to prognosticate.
Not really. We know how much cucumbers cost when you buy them from Turkey. If you can buy them from Greece instead of Turkey for cheaper, it doesn't take a Ph.D. in economics to figure that you want to at least investigate the Greek supplier instead.
This is another one of those "it's impossible to prognosticate what the weather will be next winter, but I'm betting on 'cold.'"
If I'm a manufacturer looking to build a new production in Europe, a country that was so poorly run that it was essentially kicked out, is not an attractive option, no matter how little I have to pay my workers there.
The point is to devalue enough that Greek options are competitive -- in fact, are obviously better than competitive. If Greek labor costs are comparable to Polish ones, then the Greeks didn't devalue enough. Or, alternatively, the Greek economists who made the call looked at how much money they could expect to make from manufacturing and decided that the agricultural industry would be enough to salvage the economy, essentially writing off the manufacturing industry. If, for example, they don't think that they can reduce manufacturing costs enough (e.g., if the infrastructure just isn't there).
That seems to suggest that hyperinflation isn't possible. There's definitely a point where what you're suggesting works, but aiming for it may not be as easy as it sounds. Especially if you have to keep spending while waiting for the economic miracle to occur.
Actually, hyperinflation is not usually related to devaluation; it's usually just a consequence to governments not paying any attention to their currency supply at all.
As I said, the trick is to overshoot the "right" number and devalue too much, in which case the market will automagically self-stabilize. If you undershoot, there are two problems. The first is that the market will automagically try to self-stabilize at the correct value, but this will (as Irontruth suggested) result in a further effective devaluation, but it will also cost the government a substantial amount of credibility. This does have a fairly pronounced negative effect on foreign investment -- who wants to buy a currency they expect to lose value further?
But why should we expect the Greek drachma to lose value further if we run the numbers and can get the goods and services we want at a very affordable price? Generally, you only see hyperinflation as a result of a serious supply shock, in the wake of a natural disaster, war, or something similar. There's no such supply shock on the horizon of a Grexit -- people will still want ouzo, cucumbers, and beaches, and Greece will still have an ample supply of all three.
Again, this gets back to knowing what one is doing. The Greek economists know how much the country needs to bring in and how many cucumbers Greece will need to sell to achieve that -- this is an ordinary pricing problem, the sort students all over the world do as part of an MBA curriculum. Now, I grant, if Thera/Thira/Santorini exploded again, we might see hyperinflation as the government went berzerk trying to fund relief efforts with nonexistent money, but that's not the sort of thing that can really be planned for.
Except the economists and politicians don't set the value.
Initially, they do. The government sets the rates at which is buys and sells the new currency for however long they do it. And at the "right" rate, the inflow balances the outflow. By setting the rate "too low," they can arrange that more people want to buy the new drachmae than want to sell drachmae for Euros, resulting in a net inflow of hard currency.
And in any drastic devaluation, the more you've been importing, the nastier it's going to be. Prices of imports are going to rise, just as the prices of your exports will drop. In the long run, that can be good, since it encourages the development of local industries, but until you get that going, there will be shortages and pain.
I don't think I suggested that there weren't. On the other hand, there aren't a lot of options floating around that don't involve shortages and pain, so this isn't really relevant. Similarly, the more your imports outweigh your exports, the more you will need to drop your imports and raise your exports, which means the more you'll need to artificially raise the price of imports and lower the price of exports.
In other words, the more unbalanced your economy is, the more you need to devalue. This is news?
But the real question is how to stop that devaluation where you want it. How do you avoid further inflation?
By setting the new price point at or below the level at which your new level of imports is less than your new level of exports. And, no, you probably won't avoid further long-term inflation -- no one can, with the possible exception of Japan, and they're hurting for it -- but you'll get the currency crisis under control and retain solvency and sovereignty.
In mauritania there was a government manded 200 ougia's to the dollar
Of course, no one with dollars wanted to transfer that amount in. So people just exchanged it on the black market for 300 or so.
In mauritania there was a government manded 200 ougia's to the dollar
Of course, no one with dollars wanted to transfer that amount in. So people just exchanged it on the black market for 300 or so.
Exactly. That's the wrong way to do it. The right way would have been for the government to offer 350 ougias to the dollar -- set the official exchange rate below what the natural rate is. People who have dollars will be lining up to give them to the government, which allows the government to build up its dollar reserves and get lots of ougias into circulation quickly.
Of course, you don't need or want to do this for very long; once enough of the new currency is in circulation, the banks can handle currency exchange as normal.
Regular, low level inflation is good. That's not what I'm talking about.By setting the new price point at or below the level at which your new level of imports is less than your new level of exports. And, no, you probably won't avoid further long-term inflation -- no one can, with the possible exception of Japan, and they're hurting for it -- but you'll get the currency crisis under control and retain solvency and sovereignty.
But the real question is how to stop that devaluation where you want it. How do you avoid further inflation?
Well, remember that, to a first approximation, all of your costs in the local currency are fixed in nominal terms. Whatever you were paying a local farmer for tomatoes, you will probably still be paying him something very similar. And if we're talking about Greece and not Zimbabwe, we've also got a country with a relatively functional internal economy; I can go down to the harbor and buy fish with the money I made baking and selling bread.
The issue is with important and exports. The whole point of devaluation is to rebalance the currency exchange, so imports are going to need to be reduced (i.e. made more expensive) and exports are going to need to be cheaper (made less expensive). The devaluation target is where these numbers are in rough balance. Once these numbers are in rough balance, the external demand for your currency exactly balances the internal demand for foreign currency (pretty much by definition), so there is no excess supply of your local currency to cause inflation. [Of course, the internal demand for your currency exactly balances the internal demand for your currency, since it all just circulates. You only need to worry about the boundary conditions, and setting the supply to the appropriate level of fiscal stimulus w.r.t. the internal demand.]
By itself, the market will automatically seek that level via currency exchange rates. If more people want to buy your currency than want to sell it, your currency will strengthen, and of course vice versa. It's actually very hard to keep that from happening. If you've set your "official" exchange rate, meaning, the "price" of your currency, too high, people won't want to buy it and the exchange rate will naturally drop. If you've set your "official" exchange rate too low, people will bid it up (because they can't buy more than you're willing to supply) and your currency will strengthen. This is ordinary supply/demand.
So, what is the "natural" exchange rate for Greece (or any other country)? Well, it's the point at which production costs, are sufficiently low that people are willing to buy what they produce (in preference, if necessary, to buying from the competitors), but also the point at which producers are willing to produce enough goods and services to satisfy demand. If you like, you can us a hard currency like the US dollar and figure out how cheap hotel rooms on Santorini would need to be before people want to go to Santorini instead of St. Tropez or Capri. (Actually, the people in the hotel business do this kind of calculation all the time, so it's not that unreasonable a task.) Then, figure out how much it costs in drachmae to provide that hotel room. There's your equilibrium point. (It's a little more difficult than that because some costs, like fuel, might need to be calculated in hard currency as well, but we're still in the not-rocket-science category.)
The thing about equilibrium points is that you tend to stay there once you've hit that point. Now, it's possible that a sudden negative shock -- for example, a spike in oil prices that drives up the cost of imports, or a sudden supply shock like an epidemic that keeps tourists away or a sudden frost that kills all the cucumbers -- could shift things and send the economy into a downward spiral. But that's not a function of the currency; the same thing could/would happen if Greece were still in the Euro, and in fact, Greece would be worse off in the Euro because the Euro couldn't float.
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Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.
Except there is no evidence of this in anything beyond an agreed-upon currency and a few trade deals. There hasn't been an attempt for a national language or anything else that would imply such a nation on a day to day level.
Then again, as someone else pointed out, there are loonies out there who believe the United Nations is slowly corrupting every member nation at the behest of the lizard people. So there's that.
Okay. So you are talking about fixing the currency to the Euro - at least for some period.In mauritania there was a government manded 200 ougia's to the dollar
Of course, no one with dollars wanted to transfer that amount in. So people just exchanged it on the black market for 300 or so.
Exactly. That's the wrong way to do it. The right way would have been for the government to offer 350 ougias to the dollar -- set the official exchange rate below what the natural rate is. People who have dollars will be lining up to give them to the government, which allows the government to build up its dollar reserves and get lots of ougias into circulation quickly.
Of course, you don't need or want to do this for very long; once enough of the new currency is in circulation, the banks can handle currency exchange as normal.
Well, yes, you have to do that, and that has nothing to do with "fixed" or "floating." If April 1st is the day you start using the bindersnitch, then you need to set an exchange rate for the morning of April 1st.
That doesn't mean you need to set an exchange rate for the morning of the second, or even necessarily the afternoon of the first.
I'm still not sure how anyone determines the "natural" rate of a new currency.
Analysis of production costs vs. commodity prices.
Assume we're Ruritania and we've been using the Euro. Everyone's accounts and all wages and transactions are in Euros. Now we're going to switch to our new bindersnichi. We declare that the government will give 110 bindersnichi for a Euro, even though we think it'll really be worth 100 bindersnichi, just to encourage demand.
Sounds good.
What happens to wages and prices? If I'm making 10 Euros an hour, how many bindersnichi do I get?
That's independent of the exhange rate, actually. You're right; it's got to be less than 1000 bindersnitchi, but it's also not the government's problem unless the government wants to make it their problem. If you're a government employee, it's whatever the government wants your salary to be. If you're privately employed, it's whatever your employer wants it to be. And if you're self-employed, it's whatever you can afford to pay yourself.
I would expect the government to be able to estimate a suitable target based on their expectations of how much production costs need to drop. If production costs need to drop 10% to bring imports back in line with exports, then somewhere around 900 bindersnitchi per hour would be appropriate,... as an practical matter, I'd then cut further to 850 on the grounds that it's easier to grant raises later than to cut wages again later.
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Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.Except there is no evidence of this in anything beyond an agreed-upon currency and a few trade deals. There hasn't been an attempt for a national language or anything else that would imply such a nation on a day to day level.
Then again, as someone else pointed out, there are loonies out there who believe the United Nations is slowly corrupting every member nation at the behest of the lizard people. So there's that.
Yesssss. Disssmissss ssssuch sssilly ideassss from your mindsss.
Article 50 is the mechanism by which you actually start the process of leaving the EU
Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.
You're a collective group of individual governments that report to a much larger government which has been slowly gaining more and more power over time and slowly eroding the smaller governments into one cohesive nation. And it started out as a group of governments working together.
Nope. Not like that at all
If it was so, the EU would be incredibly more powerful, less criticized and the legal possibility for Brexit would not exist
And we would not be having this discussion ;-)
Note also that those who wanted a broad integration (ie the UK) did not want even the beginning of a common government. For example there is no such thing as a EU foreign policy
I see the similarities. The US, whether the articles of Confederation or the Constitution was really weak for a long while. Each colony/state had it's own government that in some ways had even more power over the main government than the separate nations in the EU have.
It probably wasn't even until the early 20th century that the US even mattered internationally, and even then, it wasn't until Europe tore itself apart in two world wars that the US gained power to become one of the most powerful nations in the world.
A LOT of that was because the US wasn't damaged like Europe and still had a solid manufacturing base.
If you compared the US to the EU...it would be similar to the US in the 1890s...that's when they were still being threatened by pirates! (think the EU being weak enough to be threatened by Somalia and it's pirates...the EU is probably stronger at this point than the US was at this point in their union).
Part of the formation of the EU was to become as strong economically, or become an economic power equal or stronger then the US. Many saw this as a first step towards becoming something very similar to the US.
I think it could eventually lead to a united Europe, but if Brexit really exit's, I think it could cause a crisis (which is the REAL threat behind all of this...if Britain leaves, it could trigger a whole lot of other nations taking that into consideration and breaking the EU up...and that WILL really ruin markets for a LOOOONG time in Europe and the Middle East).
Unless the EU is insane (and I don't think they are yet) they are going to send negotiators. As I already stated previously in this thread, despite the vote, I don't think Parliament really wants to exit the EU. If they actually took that action, it could lead to disaster, not just for Britain, but all of the EU as well.
It is thought that if Britain exits, France's political faction that is pushing for this idea could gain traction and France could follow within the next decade leaving an EU ruled simply by Germany (who by itself, really doesn't have the economic prowess to support the EU entirely).
This gives parliament leverage to bargain really strongly with the EU (if anyone is even noticing this, of course, parliament could be crazier than anyone thought as well...but I think there are some bright minds there that have thought of this already...or so I hope). The EU (despite some crazies out there who think punishing Britain is sane...it isn't, it just hurts the EU and everyone else far more than helps) really needs Britain to stay, just like Britain probably should want to stay in the EU. The EU will recognize this and will send negotiators to try to find some way to make a deal.
With this leverage, it is possible the British could get even MORE concessions from the EU than Britain already has, while remaining in the EU and retaining many of the EU privileges.
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Europe is NOT a country and it was the habit of treating it as such adopted by so many EU lawmakers that actually started this sad sorry mess in the first place.Exactly. The EU was never meant to be an actual nation. But it's been moving further and further towards that, and I sympathize with those that do not want their national identities watered down to the point of non-existence.Except there is no evidence of this in anything beyond an agreed-upon currency and a few trade deals. There hasn't been an attempt for a national language or anything else that would imply such a nation on a day to day level.
Then again, as someone else pointed out, there are loonies out there who believe the United Nations is slowly corrupting every member nation at the behest of the lizard people. So there's that.
~chuckles from the shadows~ Close but no cigar.
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The EU has given the UK more than enough already. And they are still not satisfied. No point in trying to coddle them any further as they will always want more and are not even able to be reasonable about this. Playing with the EU's existence and the risk of yet another grave financial and economical crisis just to advance individuals' political carreers.
The carrot did not work. We will not use it anymore
I think that is the prevailing view in France. If other EU countries (Germany) feel similarly, the UK will never have it as good as it had. There is a price to pay at some point for governments acting with reiterated stupidity