June 7, 2011
A few weeks ago on this blog, I made a few guesses about what might happen and who might stand to benefit when Greece exits the Euro (here). A Brussels based policy wonk contacted me to say that “Greece won’t be leaving the euro…” in as condescending a voice as is possible by instant message.
How little did I know?
In this Project-Syndicate article by Kenneth Rogoff (the former chief economist at the IMF no less), the stakes are raised very dramatically again.
The last time, it seems that brinkmanship between the governments of Germany and Greece was to blame for the (possibly deliberate) leaking of the idea that Greece could exit. But not now. Kenneth Rogoff is about as respected and influential as they are likely to come.
To quote him, “The endgame to any crisis is difficult to predict. Perhaps a wholesale collapse of the euro exchange rate will be enough, triggering an export boom. Perhaps Europe will just boom anyway. But it is hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.”
He is guessing at possible scenarios and leaves us with just three options. One involves the collapse of the euro in the currency markets. The second seems to be more in hope – perhaps the patient will simply recover… And the third is an end to the single currency.
Luckily, his fourth offering is real. But are we moving towards “a far stronger fiscal union“?
(And no, bailing out Portugal does not count as ‘strength’).
I’m not sure that we are right now. The problem is that we need it to happen super-quick.
Whilst progress is clearly being made in the banking sector, and I should imagine that it is probably quite painful progress when seen from the inside, it is not far or fast enough. Yet, it is probably as fast as can be made (though not ultimately far reaching enough). But it all started much too late.
Whilst progress is clearly being made in many national economies, the same applies. Cuts and savings are happening, but there are again limits to how far and how fast. Some countries are probably hitting those ceilings (the UK perhaps?). Others simply do not seem to be trying enough (Greece perhaps?).
Who knows where we will end up if the pace of structural reform does not increase… The problem is that the clock seems to be perilously close to midnight and it is difficult to tell whether any more action will actually make any meaningful difference.
Keep your fingers crossed for now.financialguy