Greece is once again back on the agenda in the European financial markets and we are once again talking about Greek default and even about Grexit. There seems to be no end to the suffering of the Greek economy and the Greek population.
I must say that I have a lot of sympathy with the Greeks – they have terrible policy makers and no matter how many austerity measures are implemented there is no signs of any visible improvement either in public finances or in the overall economic performance.
Hence, the Greek economy has essentially been in decline for nearly nine years and there seems to be no signs of it changing.
To me there is no doubt what the main reason it – it is the monetary strangulation of the Greek economy due to the countries membership of the euro area.
I don’t like to see the euro area fall apart and I believe it can be avoided, but on the other hand I have a very hard time seeing Greece getting out of this crisis without either receiving a more or less complete debt write-off or leaving the euro area (or both).
ECB can’t do much more
Since 2008 there has been two dimensions to the monetary strangulation of the Greek economy.
First of all for much of the period since 2008 the ECB has kept overall euro zone monetary conditions far too tight to achieve its own 2% inflation target as illustrated by our – Markets & Money Advisory’s – composite indicator for monetary conditions in the euro zone, which shows that monetary conditions in the euro zone essentially were too tight from 2008 until early 2015 and only has been broadly neutral (indicator close to zero) over the past 20 months or so.
Second, the euro zone is not an optimal currency area and it is very clear that Greece today needs significantly easier monetary conditions than for example Germany, which might need tighter monetary conditions.
Looking at these to factors it is clear that the ECB indeed has moved in the right direction in the last two years and overall we believe that monetary conditions right now are about right for the euro zone as a whole. However, the problem is that monetary conditions still is far too tight for Greece.
As long as overall euro zone monetary conditions were too tight there was a good argument that the ECB should ease monetary policy to ensure that it would hit its 2% inflation target over the medium-term and that would help Greece. However, that is not really the case now. While there is no reason for the ECB to tighten monetary conditions it is today much harder to argue for new measures to ease euro zone monetary conditions.
That makes Greece’s problem even more acute and makes the argument for Greek euro exit even stronger.
The problem of course is that Greece is damned no matter what. If Greece stays in the euro area then the hardship continues for the Greek people and there is no reason to believe that more austerity fundamentally will improve public finances and while there have been some signs of growth beginning to pick over the past year any minor tightening of monetary policy from the ECB will likely send Greece directly back to recession.
On the other hand if Greece where to leave the euro area it is unlikely it would happen in an orderly fashion. Rather it is likely to happen in a chaotic fashion and lot of things could go badly wrongly – also for the rest of the euro zone. Just think about what speculation it would create regarding possible Italian or even French euro exit. And will euro exit also mean EU exit and what will be the geopolitical ramifications of this?
So it is not an easy choice. However, I continue to believe that it would be both in the interest of Greece and of the rest of euro area as a whole that Greece leaves the euro area.
The suffering will have to end. However, Greece should not be kicked out of the euro. Rather Greece should be helped out of the euro. Unfortunately there is little will within the EU or the ECB to make this happen and populists around Europe are eager to use this debacle to further sabotage European reforms.
See also my earlier posts on Greece her: