Category Archives: Currency union

Greece’s sovereign-debt crisis heats up, a lot

I have been following the financial crisis since its beginnings in 2007. While in the United States it seems that the crisis is all over and has been for a while, the private financial crisis blended into and partly became a sovereign-debt crisis in Europe.

Everything calmed down for a while but things have heated up recently.

To summarize developments a bit as I understand them. I do have to assume some familiarity with Greece’s problems.

Greece has an extremely serious problem with deficits and debts, very high government spending, and a tax system with high tax rates but ineffective tax collection.

A new Greek government has been voted in, at least partly based on resentment against the terms imposed by the Eurozone, the European Community and the IMF to provide assistance to Greece. Today a meeting to agree on any new terms for the Greek government fell apart. There are no plans for a further meeting. The current bailout program ends on February 28.

If the Greek government is to attain its objective of getting better terms, there must be more meetings in the near future. Otherwise the Greek government will run out of funds in the next month or so, unless it goes along with an extension of the current agreement. But the new Greek government ran on a promise not to extend the current agreement and has said that extending the agreement is unacceptable.

A related development at the same time suggests that there is another problem. Greek people are withdrawing euros from the banks and storing them against the possibility that Greece will go off the euro. The banks have about 14 weeks of collateral to get funds from the Central Bank of Greece at the current rate of withdrawal, according to one estimate. This drain of funds from the banks will only accelerate.

The Greek politicians think raising pensions, employing more government workers and raising the minimum wage will lead to growth. The Germans and most other European politicians don’t agree. Not many economists would agree either.

I think the Greek government will stick to demanding they be able to institute these three policies. They are ideologues, Marxists actually. I also think the drain of cash from the banks will accelerate. I am not sure when they’ll have to limit withdrawals. I think capital controls are quite possible.

Then it depends, but I think the other Eurozone governments have relatively little wiggle room. They have voters too.

Any forecast is a forecast of what the Greek and Eurozone countries and politicians will do. I doubt the Eurozone will go along with the three demands by the Greek government. Maybe Prime Minister Alexis Tsipras will rise to the occasion; maybe not.

It’s a forecast. This whole thing has dragged out a lot longer than I thought it would. The Greek people do not realize how serious the problem is. No politician is telling them. The problems are the evil “troika” and especially the Germans (who conquered Greece during World War II), and this has been the story all along.

To illustrate the level of discussion in Greece,

A Greek leftist newspaper close to the ruling party in Athens published a cartoon last week which showed [German Finance Minister] Schaeuble in a Nazi uniform. He is quoted saying “we insist on soap from your fat” and “we are discussing fertilizer from your ashes”, references to the fate of Jews in Nazi death camps.

Currency union and Scottish independence

Scotland is having a referendum on leaving the United Kingdom. For someone whose ancestors include mostly Irish people, this seems unexceptional. I can see points pro and con.

The odd thing was an article in the Wall Street Journal on currency union between the rest of the United Kingdom and Scotland if Scotland left the United Kingdom. There was an article by the BBC as well. Why would the United Kingdom – with about 59 million people – form a currency union with Scotland which has about 5 million people? What does the rest of the United Kingdom stand to gain from a currency union with Scotland?

It is similar in some ways to a petition by Puerto Rico to form a currency union with the United States if it became independent. Puerto Rico uses U.S. dollars and the U.S. government would have no problems with that continuing. The U.S. has no obvious incentive to share any seigniorage from money held by Puerto Ricans any more than it shares seigniorage with Panama, which uses U.S. dollars. The U.S. government also treats Panamanian banks the same as other foreign banks, at least as far as I know. Scotland would be in the same position.

Bottom line: The United Kingdom has no incentive to form a currency union with an independent Scotland. If Scotland leaves the United Kingdom, the Scottish government can attempt to choose a currency but I would be surprised if U.K. pounds did not prevail unless there were serious legal penalties. Apparently this is evident to Scottish politicians as well. They’d just rather have some of the seigniorage and probably don’t like the image of using foreign currency after becoming independent.