Thursday, November 3, 2011

More Χάος

News is breaking on an hourly basis in Europe these days, with Greece still being the center of attention.  The latest loop is the sudden appearance and disappearance of plans for a referendum on the bailout and austerity measures being put to the Greek people.  It is quite likely that Papandreou was bluffing his fellow politicians into joining him in sharing the political pain, which he may have done successfully.

As I said over here, I just don't see how the situation can be sorted out while Greece still uses the Euro.  I don't know how much adjustment of one kind or another is necessary to bring Greek labor costs down to where they are in line with the productivity* of its workers, but I suspect it is a lot.  And by a lot, I mean 15-30%.  Deflation by that amount implies that as long as Greece still uses the Euro, its citizens will, on average, have to take pay cuts of 15-30%.  This would be painful but not devastating if individuals and businesses were basically debt-free.  But that's not the case in Greece, though it must be said that they aren't close to being the most indebted.  But debt doesn't automatically shrink when wages and prices deflate.  In fact, the real burden goes up.  And substantially greater real burdens means substantially more foreclosures, bankruptcies, and corporate bond defaults.  That's why devaluation makes a lot more sense, and which would happen automatically in the markets if Greece still had its own currency - provided, of course, nobody is manipulating their currency.

So the mystery continues - why are Greek politicians pursuing such awful policies?

* - saying that Greeks are less productive doesn't mean they don't work long hours.  It just means that for one or more reasons their output is less per hour.

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