Well, if our own deficit is the Elephant in the Room, what is a nearby E300bn economy heading to bankruptcy? Will future post-election commentators wonder what on earth the Guardian was doing running so many different columns on bigotgate while the next economic crisis burst upon our shores? (to be fair to the Guardian, they also have live blogging on Greece).
I hope it comes up in tonight’s debate. Because the Liberal Democrat position on deficit cutting is, macroeconomically, the most sensible. This letter to the FT today summarises the issues beautifully (from Prof Eatwell):
to what extent will deficit reduction result in the government “chasing its tail” as expenditure cuts result in falling tax revenues as a consequence of lower GDP and employment? Second, what is the true cost of the various measures, ie, the discounted value of the stream of GDP forgone? Third, how does this true cost compare to alternative fiscal strategies (reducing the deficit more slowly or more quickly)?
My spreadsheet attempted to illustrate his first point. Try chasing some tail by downloading it.
How serious is the Greek situation? Mohamed El-Erian of PIMCO points out how it threatens the private-sector:
The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe
Is today’s news of a fall in credit demand from businesses and housebuyers signs that Europe is turning down, decisively? It is just a straw in the wind, but if you thought that a second phase of the financial crisis might be triggered by sovereign default hitting into banking balance sheets, would you be borrowing to invest or buy a house? The Economist’s Ryan Avent is more phegmatic, and seems to rely on “Germans coming to their senses’. Do you readers think this works?
A Greece restructuring is all but inevitable, but the cost associated with making Greek creditors whole is very small relative to the potential losses associated with continued chaos. … Right now the politics of a bigger German bail-out of southern Europe look deadly, but so did the politics of massive bail-outs of Wall Street financial institutions.
I think he ignores too easily how far we had to go down Crisis Lane to achieve those bailouts. Making Greek Creditors Whole? Are you sure? Moral hazard, justice, anyone? That would be toxic – not just for Germans.
But the most interesting analyses, for me, comes from Professor Nick Rowe, whose commentary here brings us back to what the Eurozone is really all about – money:
Only the European Central Bank has enough money to fix the Eurozone problem; because it can print it … (BUT) Who has the authority to say that the ECB may risk its seigniorage revenue on buying Greek or other countries’ sovereign junk, when that revenue belongs to all Eurozone governments? Nobody. The Eurozone is not a real country. There is no central fiscal authority behind the ECB. That decision would have to be reached by a political consensus of all Eurozone countries, and I don’t see that happening.
He then describes what may happen in terms that fans of Professor Scott Sumner will recognise – bank insolvency leading to a crisis of escalating money demand:
Eurozone commercial banks hold Eurozone government bonds as assets. With the drop in those bonds’ values, many commercial banks (inside and outside the Eurozone) will become insolvent. There will be (and already are) runs on those banks, as depositors seek to transfer their deposits to safer banks, if any can be found, or withdraw currency, if they can’t. The first year textbook says this fall in bank deposits will cause a fall in the money supply, and that this fall in the money supply will cause a recession.
But the central bank is prevented, politically, from doing what it needs to: expand the money supply by buying up those government bonds. His final prediction is intruiging – that sovereign states, having a shortage of Euros, will start printing their own currencies to pay their workers. New drachma anyone? (Paul Krugman, imagining similar endgames, is now under the table).
How does this play for the UK? Well, our links of contagion are probably less. As Stephanie points out, we are a safe haven compared to Greece. Check out the What’s In the Vaults Table: it’s French banks who might be in trouble here. For once, our bankers didn’t get stuck in. And our economy beats to different rhythms: check out the bullishness about private sector hiring from the CIPD today.
But every party is relying on ‘rebalancing’ – more exports, basically – and how can that happen if Europe is in a panic? I hope Clegg makes the point powerfully: unlike our Conservative opponents, we don’t believe that cutting back, in all circumstances and at all times, makes the economy stronger. And (this is a long-shot) – we need to be more vigorous with the money-medicine if we do teeter into a Double Dip. Like a wise man once said.