Greece is the (wrong) word

Here is the reason why a subscription to the WSJ is worth the money: because they run pieces by people like John Cochrane.   I’ve been trying to make sense of the Greece mess, but I was missing the key.  Here it is:

Letting someone lose money on sovereign debt is the acid test for the euro. If not now, when? It won’t happen in good times, nor to a smaller country. The sooner the EU commits, and other countries and their lenders come to terms with the fact that they will not be bailed out, the better.

The current course—ever-larger and less-credible bailout promises, angry German voters who may vitiate those promises, vague additional fiscal supervision (i.e. more of what just failed miserably)—is not the answer.

The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth. Countries only pay off debts by growing out of them. And no, growth does not come from spending, especially on generous pensions and padded government payrolls. Greece’s spending over 50% of GDP did not result in robust growth and full coffers. At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.

I’m pre-disposed to like Cochrane because he was a terrific teacher of mine (though I was a terrible student) and a super nice guy, but mostly I like him because he nits the nail on the head: as a currency the Euro is a great idea,  but the problem is that the EU can’t decide whether it is going to be a fiscal union in addition to a monetary union, so the bond holders aren’t being required to take the hit they legitimately deserve (and need) to take for investing in Greece in the first place.

A comparison between Cochrane’s arguments and those of Paul Krugman would be interesting.  But getting past the “Republicans are soooo evil” nonsense to find the actual economics is too annoying for a late night.

2 thoughts on “Greece is the (wrong) word

  1. In addition to the WSJ, I recommend subscribing to City Journal, where Theodore Dalrymple also ably comments on Greece, albeit from a moral standpoint. For comedic value, here Dalrymple’s comments from Pajama’s:

    If for some inexplicable reason you wanted to reawaken German nationalism, how would you go about it? I suggest a three-part strategy.

    First, you would replace the rock-solid German currency by one with very shaky economic foundations, against the wishes of almost the whole German population (which, of course, you would not deign to consult).

    Second, you would make sure that same population paid for the gross and dishonest profligacy of the Greek government: a profligacy that was rendered possible by the adoption of the very currency that the German population did not want in the first place.

    Third, you would do everything possible to ensure that the crisis will spread, last for a long time, cost a fortune in failed attempts to solve it, and fall mainly to the Germans to pay for….

    1. I think Cochrane would say, and I would agree, that the Euro isn’t a week currency at all. The European Central Bank has strict rules and is very independent.

      The EU, on the other hand, is on very shaky ground because it is not clear at all what kind of union it is and because of profligate spending by many member states.. Because of the fiscal mess, the EU may put more and more pressure on the Central Bank to inflate, however.

      Cochrane says that if the EU just let Greece default on some of its debt, the Euro would be fine. This would obviously not be good for Greece, but the Euro would actually be strengthened by this kind of move because it would signal European commitment to its currency. It is supporting Greece that sends the wrong signal.

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