The “European Transfer Union” option is highly unlikely to happen, considering the present financial plight of the major rich nations in the Europe.  UK is awaiting its elections, and thereby financial reforms, while Germany is already in dire straights.  France does not generally initiate such things... the EU will probably drop Greece from the Euro bandwagon and try to rope in Turkey instead.

MK

when did the Eurozone agree to a EUR 80 billion loan program?  All I have found is a 30 billion loan for next year (assuming it gets through the German and Irish Parliaments, and assuming the Spaniards can find EUR 3 billion- none of those should be the least bit problematic.)  But I haven't seen anything about 80 billion, other than some Greek financial officials saying it would be "logical."

One more conservative economist who thinks that you can discipline and punish nations as if they are private individuals. Furthermore, he is wrong about the american model and any sovereign nation with a non convertible fiat currency with flexible exchange rates. It can finance deficit spending by just spending!!!

It is amazing that even in light of such a big crisis, the old conservative/fundamentalist/Washington Consensus fallacies are still being troted all around without and consideration. It is also amazing that people completely ignore Krugman's and Stiglitz's warning. The EU is burrying its head into the sand.

The whole issue about Greece, Protugal, Spain, Ireland, Italy, and hell lets throw in France and UK is not about their debts but that are suffering from the consequences of the Great Recession. Spain got a better fiscal record than Germany before the crisis and I have yet to see any German political/academic "elites"(meaning pretentious in this comment) mentioning it. How about the housing bubble in those countries supported by German capital that caused costs to rise?

Euro is a clear failure which shows that a monetary union without fiscal policy will never work. Oh and you got the US completely wrong: there are various levels of federal jobs in the States and those jobs are included in the US-wide bailout. And there are federal employment insurance and social safety net, whereas EU countries have to pay them out of their national accounts.Ever occurs to you that Greek needs to maintain its level of social service?

Ever thought about that when the Euro was created? There were plenty of warnings, but EU choose to ignore of all of them and when the crisis hit, it points the finger to individual, small countries (newly developed no less). No wonder UK didn't want to join and what a great insight it had!

"Automatic fines would punish any country whose debt-to-GDP ratio..."

Think about it for a second, Professor, how is it going to help when the country is already deep in debt? Your solution is to take more money out?! Suppose a person is so deep in debt and he is nearly bankrupted, and you asking for higher interest? Any sane and responsible person will tell you that is not only predatory but also unhelpful to deal with the situation.

If Germany and EU had acted fast to save the PIIGS, it would have been way cheaper to deal with. The issue is growth, and if more is invested in growth, those countries can get out of this quagmire without significant damage. And if only they could devalue. Germany is gaining significant trade surplus exactly because of the discrepancy in real exchange rate, and again Germany is excused from its responsibility to help at the same time it has the right to advocate punishment. What hypocirsy!

You know what, let Greece abandon the Euro, likewise for the PIIS. Let's bring on the mother of all crises. Hell, we don't need to wait for 2012 at this rate.

P.S. My tone maybe a bit rude, but it is merely a tone, a meek voice with no implication in real policy choice, as I'm neither a professor nor have I a column in Project-Syndicate. You, sir, on the other hand, are the opposite. Consider that before you speak.

Europe should ideally avoid the automatic bailout and the transfer systems of confronting financial difficulties.  Both strategies would require a strong sense of community backed by powerful political and financial institutions.  The level of regulation and high penalties required by such systems would be impossible to apply to a bnkrupt state.  You cannot meaningly fine a bankrupt, particularly one runnig a Ponzi sheme.

The better solution for the longer run is to make it clear to the PIGS that bankruptcy is a real possibility.  And lenders at high-interest rates should realise that they receive high rates to compenste for high risks of default.

Financial markets, European politicians, and the Greeks all have to learn that Greece can be allowed to go bankrupt in the interest of protecting the wider Eurozone, just as the United States can allow a great bank, large company, or a state to go bankrupt without threatening the dollar.

As German Chancellor Merkel has realised, it cannot be good to simply rush to rescue profligate Greeks without imposing strict regulation and penalties.  The difficulty is that it is meaningless to fine a bankrupt, particular one runnig a Ponzi scheme.

Unfotunatley, in part due to the ignorance exhibited by the financial markets, lenders, politicians, and Greeks the possibility of bankruptcy has not been properly understood.  Perhaps less surprisingly, lenders of high risk funds receiving high interest rates as a compensation for the higher possibilitiy of default, now believe that Eurozone states should guarantee repayments.

There is little moral justification to assit Greeks or those who financed their irresponsible expenditures.  The only real reason to assist Greece is the level of short run collateral damage that may be inflicted on other members of the Eurozone if Greece does go bankrupt. 

Above poster,

Are you a German? And do you listen to what others have to say? It is so ironic that Krugman predicted that exact thing would happen back in the 90s and the biggest obstacle to recovery is none other than the Germans. And it is only the Germans who are opposing helping out the periphery Europe.

Do you realise that a country is not an individual? When you "punish" a country, it is the citizens, Greeks in this case, who are getting hurt. Do you understand that you and your German counterparts/compartiots are pushing a great depression upon the Greeks? Even if the Greek government did some funny accounting and lavish spending, you think the Greek population played a part in that, and that all the Greeks come together in a conspiracy to scam the German?

The problem is not with the Greeks; it is the Euro and the autopilot set in the ECB (a German style mechanism). If Greece can devalue it can get out of the trouble without problem. Just take a look at the UK. Furthermore, the bubble that caused the whole crisis from the begining was unchecked by the EU institutions because the EU wanted and still wants unhindered, unchecked, volatile capital flow. Blame EU law and its instituions, but not the Greeks citizenry. Furthermore, if Greece default it is likely to cause a bigger crisis then the one we are still experiencing.

It is criminally irresponsible to not help the Greeks especially when you have put them into a policy straightjacket.

Above poster,

Are you a German? And do you listen to what others have to say? It is so ironic that Krugman predicted that exact thing would happen back in the 90s and the biggest obstacle to recovery is none other than the Germans. And it is only the Germans who are opposing helping out the periphery Europe.

Do you realise that a country is not an individual? When you "punish" a country, it is the citizens, Greeks in this case, who are getting hurt. Do you understand that you and your German counterparts/compartiots are pushing a great depression upon the Greeks? Even if the Greek government did some funny accounting and lavish spending, you think the Greek population played a part in that, and that all the Greeks come together in a conspiracy to scam the German?

The problem is not with the Greeks; it is the Euro and the autopilot set in the ECB (a German style mechanism). If Greece can devalue it can get out of the trouble without problem. Just take a look at the UK. Furthermore, the bubble that caused the whole crisis from the begining was unchecked by the EU institutions because the EU wanted and still wants unhindered, unchecked, volatile capital flow. Blame EU law and its instituions, but not the Greeks citizenry. Furthermore, if Greece default it is likely to cause a bigger crisis then the one we are still experiencing.

It is criminally irresponsible to not help the Greeks especially when you have put them into a policy straightjacket.

Unfortunately, for the coherence of Hannibal's jaundiced views of Germans, I am not German.  It is said to be typical of those with weak arguments to attack the bearer of unpopular information, particulalry when accurate and objective.

I draw his attention to the Greeks rioting in the streets, presumably because they are reluctant to face the fact that they cannot continually expect to be subsidised by others. That will remain true whether  or not Greece has its own currency or is a member of the Eurozone.

Admitedly European  Leaders were too lenient in the past, and generously permitted Greece to get away with a certain amount of 'funny accounting', i.e. lies. But Greece abused that that generosity, Greece chose to borrow still more, rather than use the time gained to budget responsably.

In a democracy we tends to have the government we deserve, rather than the government required.  Greece has diffficulties because it chose governments that responded to unreasonable public demands.  It placed itself in the hands of money lenders.  No one, to my knowledge, forced Greece to spend more than it earned.

It is too easy to blame a 'German conspiracy', European law, or European Institutions, when seeking to avoid responsability for one's own errors of judgement.  Nevertheless, surely, it would be criminally irresponsible to allow Greeks to continue to pile up debts and live beyond their means, or allowi them the delusion that the world owes them a rich and unearned stipend.

Rustylink,

Leave the moralizing at home and stop blaming the Greek people collectively because they made the mistake to join the euroland and face the straight jacket of a revenue constrained fiscal policy. You know nothing about Greece and Greeks are not living beyond their means because of budget failures. As about letting Greece default, please do that so European banks that own 82% of Greek debt can take their losses and go home and the euro depreciate substantially so Greek output and services can be sold outside of Europe!

wDear Panayotis,

Unfortunately for your argument there exists no country, ompany, family, or individual, capable of avoiding the constraints of revnue.  In the long run no currency manipulation devaluation, Ponzi scheme, or even barter system can avoid this elementary fact.  To think otherwise, is to live in a world of naive illusion.

Not even governments printing their own paper money can avoid the straightjacket of fiscal revenue.  An interesting recent attempt to avoid such constraints, a rather extreme example of such an idiotic approach, was seen in in Zambia.  The resulting inflation, quite exceptional, destroyed the Zambian economy despite Zambia not being in the Eurozone.

Rustylink,

You probably have never heard of the fallacy of composition, the paradoxes of thrift and liquidity and the multiplier concept! You obviously do not understand that a soverign government with nonconvertible fiat currency with flexible exchange rates has no technical revenue constraint! As far as inflation is concerned, with underutilized resources and recession, you are dreaming about  inflation!  The examples you mention are not new and have nothing to do with fiscal policy per se but other reasons, including structural problems, inefficiencies, svere devaluation, etc.

Dear Panayotis,

Even a sovereign government with a nonconvertible fiat currency and flexible exchange rates has constraints. In a real world situation an economy has to pay for its imports by producing goods and services sold on world markets, and be considered solvent if it wisges to borrow.

In the abscence of increased exports, printing fiat currency to finance deficit fiscal poicies, or alternatively attempting to continually increase government borrowing, will inevitably fail. The former proceedure leads to inflation and devaluation. The later generates demand that hasn't been earned. This leads to a failure of creditor confidence, high-interest rates, the refusal of financial markets to lend, and ultimately devaluation when importers are forced to pay cash.

In both cases, inflation will result, despite the presence of unused resources. The presence of unemployment, and unused resources, in no way excludes inflation when available resources or manpower skills, lack the flexibility required to match the structure of demand.

Evidently, a better use of all available resources is needed if the Greek economy is unable to produce or pay for the goods and services it requires.  This can only be achieved by restructuring consumption and production, including moving manpower resources to more productive activities.

Simplistic deficit financing cannot  expect to make full use of Greek resources and reduce imports if the present consumption patterns are continued.   In the absence of fiscal prudence solutions cannot be expected, particularly  when unbridled fiscal deficits are used to continue financing private consumption, salaries, pensions, government services, etc.  and that necessarily limits the range of realistic fiscal policies available.

Unrestrained use of fiscal and/or monetary policies would continue to draw in imports that will be difficult to pay for in the absence of increased exports  (and where do they come from if current spending patterns are maintained). Borrowing from increasingly reluctant foreign sources, needing to be convinced they can be reimbursed, would be very expensive or unlikely. Devaluation strategies increase the relative cost of repaments and imports, thus contributing to inflationary pressures.

The illusory, solution is to believe a continuing an gradual depreciation of the sovereign fiat currency will free policy makers from fiscal reatraint. But that policy would inevitably fail as lenders at home and abroard will require repayments in appreciating currencies, the dollar or perhaps the euro. 

I admit, making the assumption that the Greek ecconomy is not perfectly flexible.  But, that changes little. Inflationary conditions and devaluation will inevitably result from fiscal policies that fail to recognise that even sovereign governments cannot get a gallon out of a pint pot.      

Panayotis,

One thing I have learned during this Great Recession is that there can be no rational debate with Saltwater people, conservative, and deficit hawks and so on. In this thread we have 2 deficit hawks, Mr. Sinn and Ristylink (and many others in Euroland, Merkel to name a few), who have absolutely no idea about the root of the problem.

The costs in Greece was inflated because of the bubble. For Spain it is just ironic; the housing bubble was supported by German captial. Once the bubbles burst then they are left with all debts without capital. Now they face the same problem. And the deficit hawks seriously want us to believe Greece, Spain, Portugal, ireland, Italy all run a scheme to scam Euro monies? And as if they do not already face severe recession consequences already! It is not only they need devaluation to face their debt, they also need money to support their economies. The Euro denies them both.

The deficit hawks willfully igorne that even the UK and France are running an increasing deficit. France's currrent debt to GDP is ~85% and 7.5% deficit to GDP, where is the outcry? And the prospect by any respectable agency is that it will get worse. The only difference between them and PIIGS is that they have traditionally much stronger economies. And if one takes a look at the UK, it is exactly the fiscal+monetary policies that is getting it out of depression land.

The deficit hawks not only ignore argument from the other side but they also ignore data totally, Krugman has been keeping a good record on that willful ignorance. They want to invoke inflation fear when demand is already deeply depressed, when real interest rate is way below zero. When the countries are facing deflation, inflation is exactly what they want.

I would not spend so much time talking about Euroland, they get what they deserve for demanding a narrow-minded institution; however, the world, as it currently stands, is deeply interconnected.  If Europe want to tax the Greeks by not helping out, I'll say the world should also tax Europe, esp Germany for their savings.

When Greece defaults, it should get out of Euro and EU and start taxing EU products. Let the rest of PIIGS follow. Then let the bank runs on the Euro to happen. Sounds like a perfect strategy to me.

Rustylink,

You are misrepresenting what I say. In my own theoretical work I distinguish fiscal policy as automatic for stabilization purposes, discretionary for allocative purposes and growth and discretionary for develpment purposes that deals with long term resource inadequacies and inefficiencies with qualitative measures. You could actually end up in a situation that even with full employment of resources inflation pressures can be checked and growth mantained as long as complexity entropies (reduction,inertia, illusion) are dealt with. Of course this is a big IF as the system contradictions because the drive for perfection will be counterbalanced by complexity as the impossibility theorem correctly implies!

Hannibal,

Thank you for your comment. Deficit hawks are either naive or serve an agenda (political, ideological, special interests such as banks etc.). At the end it is the people that pay for their policies!

Rustylink,

One more thing! Fiscal policy in a regime of fiat non convertible currency with flexible exchange rates is not TECHNICALLY constrained to 'finance" its position with debt as it can credit/debit accounts depending on whether it spends or taxes! Can fiscal policy be efficient and effective in the presence of structural imperfections? I cannot answer that! An economy facing debt market pressures avoids issuing debt. Inflationary frictions are dealt with in my previous comment.

Panayotis,

"Can fiscal policy be efficient and effective in the presence of structural imperfections? I cannot answer that!"

Exactly! Nobody can answer that because it depends on how a country restructures itself. Nonetheless, comparing to the fixed currency regime, floating regime has at least +1 way (and the restructuring plan has Nth possibilities) to work out of the problem, whereas the hard hard peg of Euro has none; +2 when monetary policy is accompanied by fiscal policy.

We need to keep in mind that the costs for the restructuring would be way way cheaper if it weren't for the demand of fiscal austerity by the deficit hawks. In essence, the deficit hawks are troting out a self-fullfilling prophecy saying that "if you don't follow our ideas you will fail", which is not a helpful solution at all, while at the same time try their best to delay known viable, Keynesian solution, and when the costs is too high it fails, they can say "I told you so".

The basic solution is still spending our way out; a lesson relearned from the Asian Crisis. It seem to me the EU has become another IMF (of the 90s).

Hannibal,

Agreed. Growth is the key but with discretionary development policies to deal with inefficiencies/inadequacies. However, notice that tax evasion and waste control must be primary considerations to deal with the distortions and excessive behavior (speculation, overconsumption) they cause.

Dear Panayopolis,

Your interesting clasification of fiscal policy makes my case.  Automatic stabilization policies, for example, imply constraints.  I also agree with your 'big IF', but therein lies another set of significant real world constraint. 

Even if desireable, a floating exchange rate regime wouldn't allow  Greece the kind of eononomic autarchy that Britain enjoyed in the nineteenth century, the United States in the twentieth century, and possibly China currently.  There will, therefore, always remain the need to convince foreign lenders if persistent import-export deficits cannot be eliminated, i.e. another constraint on economic policies. 

The expression 'not TECHNICALLY constrained' implies a certain theoretical detachment from the inconveniences and 'imperfections' experienced in an environment subject to egregious human behaviour, including political, social, and frictional effects.  The appropriate situation short-term deficit financing, can have its place, but the practical Keynesian theory has limitations both in the longer run, and most particularly for economies that cannot avoid the implications  of financing persistent export-import deficits.

France and the UK illustrate another constraint, the need to retain the confidence of creditors, both domestic and international. It is evident that the level and persistence of their deficits are begining to emphasise importance of the long term viability their fical and monetary policies.

Serious economic advice must take into account the world as it is, not the world as we might like it to be.

Dear Rustylink,

The classification of fiscal policy is made so that these problems you mention CAN be handled. We are economists and not magicians. There is another point that you are missing regarding Greece. It has the ability to borrow domestic savings as the population is a net saver and has a low private debt to GDP ratio relative to many other countries such as the US, Britain, etc. It is like a minor case of Japan! Part of restrucuring of public debt in my plan included this debt substitution.

See new Stiglitz piece. One interesting point he makes: let Germany leave the Euro!

Yes. Stiglitz among a growing number of economists begin to see the errors of the EU ways! A complete failure of the EU institutions, including ECB and their neoliberal policies.

Dera Panayotis,

If as you contend Greece has the ability to "borrow domestic savings as the population is a net saver" why is Greece constantly borrowing abroad?

The problem is not one of classifying fiscal policy it is a question of paying for real resources imported by, and consumed in, Greece as a result of profligate government and domestic expenditures.  Any attempt to use a flexible or gradually decling fiat currency in such circumstances would lead to inflation (and probably abrupt devaluation) unless Greece could miraculously acquire a frictionles redistribution of resources and cease importing goods and services it lacks the means to pay for.  Judging by the riots in Athens, the latter possibility appear highly implausible.

Japan is a very interesting example.  Japanese governments have for years made sustained attempts to resuscitate the Japanese economy by the use of deficit expenditures. They have failed despite high domestic savings permiting very low interest rates olicies, a well-developed modern economy, and a favourable balance of payments position.  And they are not subject to the advantages and disadvantaes of being a member of the Eurozon.

Evidently the European and Euroone Institutions are imperfect, but Stiglitz  is distinguished by the impractablity of his suggestions.

Dear Rustylink,

 Again the inflation myth which is nowhere in sight except in Greece that followed these polcies mainstream economists, the EU and the IMF have recommended! Interest rates are rising with the austerity measures and not the opposite. As about Japan it shows you that even with 200% Public debt to GDP ratio it can still finance its debt service with low rates because of the domestic savings!

Economists like yourself are ruining the EUwith subpar growth and unemployment rates. Instead you are concerned with structural problems which can be dealt with by development policy. You are not getting the point. If the Greek private sector has entreprising problems (not high wage cost or low labor productivity), if there is wate/corruption and tax evasion issues does not mena that you address thse problems with austerity measures. Who is responsible for the mess in the EU, the ECB and the EMU policies certainly you cannot blame them on the Greek pensioners and wage earners. Maybe you should look in the mirror! 

The old conservative myths still trotted out all around as if they are free. We have never seen austerity measures successfully counter any recession, from Great Depression, Mexico 1995, Asia 1997, Argentia 2001, Russia, to now, let alone promoting any real development.

But of course, freshwater and conservatives will counter that recession is not a recession but real business cycle, which in Larry Summer's word is ketchup economics. Now we see that ketchup all over Europe: you will be in debt if you spend too much, while ignoring the state of unemployment, productivity gaps, and predatory trade surplus. These more important-than-debt issues are not only not covered in the headlines, they are even given the handwave treatment by the European "leaders" (example http://www.project-syndicate.org/commentary/fischer48/English) to discourage any real discussion about them.

If the Great Recession still hasn't been treated as the wake up call, let Greece fulfill that role. If we still cannot learn from this crisis, world economy is pretty much doomed. And there is no sign of the learning for the majority as of yet.

Another point, inflation fear is a sel-fulfilling prophecy. The US, Uk are deep in, and still accumulate debts, but they have low interest rates, both real and nominal. The only reason why Greece face difficulty in financing is beacuse of the Euro, the uncertainty of outside help, and most importantly the lack of growth.

The Greeks want thru a spending spree? That maybe true but there was also a bubble, as in other troubles countries, another thing not mentioned in the media. It is nature to kick back a little when the prospect is good, even if the prediction turns out to be wrong. Still, what is needed is reform and get sustainable growth, not austerity, the latter does not help at all.

Dear Panayotis,

Inflation is not at present on the cards for Greece because it is in the Eurozone.  Continuing profligate expenditure patterns under a flesible 'Greeck currency' woulf inevitably involvre inevitably involve inflationary diffficulties.

Greek pensioners and wage eraners have benifited form the policies implemented by the government they choose. To that extent they are responsibile for the present situation in Greece.  Evidently the politicians they supported are also responsible for the Greek situation, they did not exercise prudent leadership.  That is the past, now the consequences are more evident. Even pensioners and wage earners cannot reasonably expect to be paid more than the economy can afford in terms of real resources (goods and services). This is not a 'blame game'. No one is trying to punish Greek pensioners and wage-earners, (Usually, it is the creators and managers of Ponzi schemes that are prosecuted and jailed).  The issue is  simply one of matching expenditures to the resources available.  An economy cannot consume more than it produces, no matter what economic system is used.

The Greek private sector difficulties you allude to can in the long run be delt can be addressed by Greece, and with the help of Europe on the basis of such assistance is directed to productivity increasing investments and not being diverted to and squandered.  Once again there is a need to face up to the constraints imposed by the need to retain the confidence of internal and international lenders.

Hannibal is right to indicate the need for sustained growth. Investor confidence could then be regained, and outside help expected on the basis of realistic reforms favouring growth being implemented.

Japanese domestic savings, considerably higher than Greek or European levels, permitted very high japanese deficit financing. But this alone has not saved Japan from its long lasting recession.  Japan has  failed despite the advantages and disadvantages of enjoying their own fiat currency and flexible exchange rate regime.  Eurozone considerations are not the real cause of Greek difficulties.   Such difficulties stem, more fundamentally, from a lsck of investor confidence in Greek prospects comensurate with the level of debt incurred by Greece.

At the European level the present mess is undoubtedly the fault of our so-called 'political leaders' who operating, largely behind the closed doors of the European Council, have inflicted on Europe a monetary system with inadequate institutional, procedures, and regualtive structures, including a failure to establish effective peanalties for non-complience,

From the first days of the ECB and Euro,our European 'leaders' chose to avoid the constraints on personal/political autonomy that a viable Eurozone required.  European electorates and opinion leaders are also responsible to the extent they have encouraged and permitted their national representatives to get away with evasion, obfustication, small-minded natioalistic attitudes, and shoddy compromise.

If we really wanted to reform the economic structures of the EU, we could do well to examine such politically taboo subjects as agricultural subsidies.  But perhaps that is a subject we should adress another day..

Dear Rustylink,

Be honest, of course you are trying to punish Greek wage earners and pensioners! Who is paying during these austerity maesures? They are implemented not because they will bring prosperity to the Greek economy but to try and assure that lenders will be payed back in full! Of course maerket speculators are not buying this nonsence as they expect a serious negative feedback loop which is expressed in the high spreads and in the inverse yield curve.

Again, you are confusing structural problems not related to wages and productivity with austerity measures that will not bring growth but recession. You can keep raising VAT and other sales taxes raising prices and lowering wages but the competitiveness of the private sector will not change much. Typically for a mainstream economist you are mistaken not only in the austerity measures you are supporting without any debt restructuring but also recommending "structural" market measures such as wage cuts and flexible employment policies and/or participation licenses. Hannibal has given you a little history of the results of your supported policies.

Incidentally, if you thing that interest rates will drop from the program and investment spending will rise, you are wrong!. As my own analysis demonstrates austerity measures will raise the probability of default among other factors such as uncertainty and interest rates will increase! Look at what is happening to rates after the measures have been announced and is getting worse as more austerity measures are proposed.

As for Japan my point was that by using domestic savings and being not revenue constrained, Japan is avoiding the problem of financing its debt with reising interest rates and markets know that!

Dear Panayotis,

Any fool can enjoy prosperity if someone else is paying for it.  Surely it is not a punishment to require someone to live within their means.  Necessarily, that involves reducing expenditures.  There is no magic source of 'mana from heaven'.  The world does not owe Greeks a prosperous living just because they lived well on borrowed funds.  Unfortunately, when you borrow the implication is you pay interest and remburse the loan in accordance with the terms agreed.  Otherwise, lenders simply lose confidence and ultimately won't lend.  And why should they?

You are right to draw attention to the unpleasant consequences of having to tighten the proverbial belt and find the means to repay interest and loans.  But the only alternative to Greece having the freedom to make that kind of mistake is to enforce strict regulation of government deficit and debt levels. Unfortunately for Greeks the negative consequences they may suffer are less important than the credibility that is gained by Eurozone Institutions if they take the measures required to retain investor credibility.  Indeed, a European crash would inflict more damage on Greece than any reduction in profligate Greek expenditures or Greek bankruptcy conducted within the Euroone.

An essential diference between the Greek crisis and historical examples cited is that the Greek economy is only one small part of the the European economy at risk.  At least Greece is advantaged by a continuing ability to trade in a relatively stable currency and thus protected froom the full consequences of its choices.

The chaos and devaluations, the austerity programs, the constraints and restrictions imposed on foreign trading, on holiday expenditures, on capital transfers and foreign purchases, etc.,  experienced in the years before the Eurozone should be recalled before anyone advocates throwing it over in favor of a resuscitation of a multipicity of national currencies in Europe.  

Interest rates paid by Greek borrowers are likely to remain high untill lender confidence is restored.  Instability and uncertainty raises costs, and certainly some economic activities in Greece will suffer from reductions and redirection of expenditures. But that is to be expected and is required if constructive changes are to be realized. Self-evidently, when necessary confiidence can be won by achieving growth or demonstrating economic flexibility, rather than simply by maintaining austerity cuts, such policies should be vigorously pursued.  The two policies are intimately interrelated, but winning investor confidence is vital. Austerity is not an end in itself, it is not necessary when demand is satisfied by increased productivity and lenders have enough confidence to extend indispensible credit.  The difficulty is that once credibility is lost, tha the need for lender confidence is immediate and it inevitably takes time before the fruits of economic reform can enhance productivity.

 Rustylink,

You have finally revealed yourself. You are not interested for the wllefare of Greek people but rather the interests of those that benefit from the gang of four the EU, EMU, ECB and the lenders!  Greeks are not living beyond their means certainly not those that will end up paying for these policies. As about credibility, the Greek government has a responsibility toward its own people that elect it and not towards well payed EU technocrats and European bans. Your system is entering into a crisis you cannot stop! At the end you will pay for it dearly. As Krugman and many other economists predict and not just myself the restructuring with a serious haircut will not be avoided. Dont cry for me Europe........Start sweating!

With advice like yours there is little hope for Greece or Greeks.  If you don't listren to realistic advice, and persist in indulging in illusions laced with paranoia,  you are condemning Greeks and Greece to unmitigated disaster.  Attacking the messenger will not change the facts.  Judging by the tone your eroneous acusations you feel you have lost the argument.

Rustylink,

You have no arguments but excuses for the interests you are representing. Thus there is nothing for me to loose. I have stated my case clearly and with powerful economic analysis whic you have no desire to listen, You have not provided any counterpoints but "moralizing" staements against Greeks which must be sacrificed for the interets you are representing. You have insulted Greek people. I hope and fight to have many other Greeks to join the fight and understand that the bottom line is who pays. I say the bankers first, the EU and the ECB next and Greeks should focus to put their house in order by promoting growth and true structural changes. There is no solidarity in Europe but only benefits for those that profit from austerity measures. I believe that soon the Greek people will overthrow theses policies and proceed to restructure the debt with a serious haircut, move to domestic borrowing and if they have to they will reintroduce the drachma. As for your euro start sweating..... Am I the only who says so? Try Krugman, Feldstein, Johnson, Eichengreen, Stiglitz and many more. I am in good company! Who lost the argument?