• March 20, 2015

March 17, 2015?If a poll published last week by the German\r\nbroadcaster ZDF gives any indication, just more than half of Germans no longer\r\nwant Greece to be part of the 19-country eurozone. This is up from a month\r\nearlier and reflects a sentiment, as Bloomberg News reported, that the debtor\r\nGreeks aren?t ?behaving seriously.?

More on that judgment later.

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Officially, Germany wants to keep Greece in the euro and\r\ndemands that Greece continue to accept existing austerity policies to reduce\r\ngovernment spending as a condition for extended debt relief. Greece, which\r\nelected a new government in January on the Syriza party?s antiausterity platform,\r\nhas proposed to change the terms.

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Political economist Mark Blyth, who spoke to economists and\r\nother analysts at Nathan Associates on March 16, says it?s possible to imagine that\r\nGermany, Greece?s largest creditor, could live with a grexit?Greece?s exit from the single currency.

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New Drachmas, Default

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In a ?slow motion bank robbery,? Greece would begin by accepting\r\nthe budget surplus requirement?already attained?for as much as ?500 to ?600\r\nmillion (US$530 million to $637 million) in emergency assistance to Greek\r\nbanks from the European Central Bank. Greece would quietly print a new drachma,\r\nthe national currency, as Germany looked the other way. At some point, Greece\r\nwould shut its banks to make the transition to a new currency, paying\r\ninternational bills with the euros during that ?bank holiday.?

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Greece would later redenominate its debt, which would be\r\ncheaper to pay off than in euros. While improving tax collections to enforce\r\nfiscal discipline, Greece would also default as Argentina did in 2001, but have\r\nsound policies in place to take advantage of the growth that default unleashed.\r\nGreece could still remain in the European Union, and receive support from the\r\nUnited States as well the International Monetary Fund to block Russian\r\ninfluence.

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Two Views for 2015

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What do the Germans get from this? ?A fiscally tight but\r\ngrowing Eurozone,? said Blyth, Brown University?s Eastman professor of\r\npolitical economy and author of Austerity:\r\nThe History of a Dangerous Idea (Oxford University Press 2013). The round\r\nof quantitative easing, or bond buying, that the ECB embarked on March 9 to the\r\ntune of ?60 billion ($64 million) a month, the ?Juncker plan? for pumping\r\ninvestment into the European economy, and low oil prices could supply the\r\ngrowth part.

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Blyth offers a ?pessimistic view? of 2015 as well in which\r\nGreece, which ?is insolvent,? rejects ?debt-servitude? and reacts to external\r\npressures by becoming even more populist than it already is, setting an example\r\nfor other periphery Eurozone members like Italy, Portugal, and Spain. Banks in\r\nthe eurozone hold ?1.2 trillion ($1.27 trillion) in bad loans ?in an\r\nenvironment of low growth,? with double-digit unemployment ?almost everywhere\r\nexcept Germany,? aging and emigrating populations, and expectations that prices\r\nwill keep falling?a disincentive to spend at current prices.

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A Critique of Austerity

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Blyth?s discussion of the current situation, which is coming\r\nto a head as Greece could run out of cash this month, follows his general\r\ncritique of austerity as a response to what has been mislabeled as a ?sovereign\r\ndebt crisis.? In reality, the debt crisis is ?a slow motion banking crisis?\r\nwith multiple origins dating to the adoption of the euro itself and including\r\nhow European banks rely more heavily than U.S. banks on the short-term sale and\r\nrepurchase of assets to obtain funds.

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European policymakers, after initial responses to a credit\r\nsqueeze that began in 2008, started focusing on public sector spending in 2010,\r\nwith demands for budget-tightening. Austerity brought about a ?continual\r\ncontraction? because austerity increased the debt-to-GDP ratio. As Blyth put it\r\nsimply, ?austerity shrinks GDP and makes debts bigger.?

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The ECB?s measures in 2011 and 2012 known as longer-term\r\nrefinancing operations (LTRO) enabled banks to put money into the economy\r\nthrough debt purchases. But the contraction was so severe that the results were\r\nmuted. There was too little growth and too little accompanying inflation to\r\nwhittle down the debt.

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Saints and Sinners

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Despite all the ?tough talk and slapping down the populists\r\nat the moment,? enough Germans ?recognize that this is a banking crisis and\r\ncontinual contraction isn?t working,? Blyth said in a paper he presented along\r\nwith giving his talk.

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But the crisis has fed dangerous stereotypes of debtor\r\nnations and creditor nations ?as if being a debtor or creditor is a national\r\ncharacteristic.? Data on national debt show that the ?notion of saints in the\r\nnorth and sinners to the south doesn?t exactly map out.?

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