The further consequences of Greek default

Felix Salmon, a self-described sovereign debt geek (better than being a sovereign debt Greek at the moment), has a hard time explaining why Americans should care about potential Greek default. The answers in his comment are largely unconvincing, since they rely on people being persuaded by analogy: it’s just like our problems with municipal debt, or it shows what happens if you let the debt/GDP ratio get out of control. I have a more prosaic suggestions. A Greek default would cause a further drop in the Euro and a rise in the US dollar. US exports, which need all the help they can get, would be harmed. That’s not good for a still-sputtering economic recovery in the US, and it’s even worse for job recovery in the US.

We may not have a Greek default, of course. Paul Krugman reckons the weekend rescue package “does rise to the scale of the problem, and it might work”. I generally adhere to Brad DeLong‘s Krugman rule: 1. Krugman is always right; 2. if you ever have cause to doubt Krugman, see #1.

But what ifs are both enjoyable and valuable. I had a good discussion with some colleagues the other day about the widening ripples from Greece. Contagion spreading to Portugal, Ireland, Spain and Hungary. Sure. The UK getting caught in the web, perhaps, but the flexibility to let sterling slide helps a lot.

I find myself speculating about what happens to Germany. It’s still one of the world’s great exporting nations. It just lost the crown to China, but 803 billion Euros of exports in a recession year isn’t too shabby. I’ve always understood that one of the keys to the global success of Germany’s manufacturers was the discipline of the strong Deutschemark, and more recently a strong Euro. So what happens when the Euro becomes a soft currency? Will German manufacturers suffer the British disease? Cultural changes like that don’t happen quickly, but an extended period of working with a weak currency could bring changes we don’t yet expect.

Update Uh oh. A problem with the Krugman rule. Felix Salmon points out that there’s a Sunday Krugman view and a Monday Krugman view. He’s not so happy today.

6 thoughts on “The further consequences of Greek default

  1. Cliff Tan

    It never fails to amaze me the arrogance and chutzpah of academic economists. In a world where current central banking is dominated by their ideas of dead and living economists, on a watch that nearly saw the demise of the global financial system, these pundits (and where else but on a site named Davos Newbies can they find a soapbox?) now feel justified to pick over the detritus of their handiwork and pronounce judgments on what will or won’t work (like their analysis did so well last time).

    The Krugman Rule? Sort of reminds you of baboons picking the fleas out of each other’s fur, doesn’t it?

  2. Oliver

    Which central bankers contributed to this problem? Greek public debt has been made by the government not the central bank. German central bankers were not happy about the Euro, which is responsible for allowing Greece to get so deeply into debt.

  3. Cliff Tan

    After a week like this you might want to rethink the Krugman Rule.

    @ Oliver

    My original post was not some ludicrous claim that central banks somehow created the Greek debt problem. Where central banks contributed to the problem were as absentminded guardians of the financial system. Where were they when European banks were filling their socks full of Greek and other peripheral EU debt? Global central banking today is heavily driven by the thinking of academic economists – so the question is if such ideas have been shown up (and again this week) as deficient, what gives them the right now to prognosticate further?

  4. blue monkey

    Greece and Spain won’t pay back. This was a calculated Risk, and a Lesson for the Banking System. The only thing Germans can do is:
    REPOSSESS 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSSESS 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.
    Don’t worry; the ECB, the Fed or both will print the money.
    And all of us will share the pain, with our hard-earned money.
    Bad is never good till the worse happened.

  5. Nick

    The problem lies less with regulators and more with the short-termism of politicians who subscribed to the bankers’ world view of Gekkonomics. It was impossible for the Bank of England to oversee the problems in the financial industry because it was stripped of this duty. The regulators couldn’t regulate.

  6. Joshua Slusar

    Given the awful developments in Greece and other states, you have to wonder whether any of the more solid EU countries that have adopted the Euro ever would join the EU, if they could turn back time. Since it is on the Euro, Greece cannot devalue its currency and begin to work its way out of the current crisis. There are other problems. Many in Greece retire between 50 and 55, whereas the Germans work until 67. Tax evasion and corruption are rampant in Greece, and far less so in Germany. It would be one thing if Greece had simply fallen on hard times. It is another for a country to shirk its obligations and pass off its hardships on its neighbors.


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