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On July 08 2013 21:48 WhiteDog wrote:
You were saying the exact opposite.
Admittedly, I did not clarify long run and short run at first, but at that point I assumed you were aware of the fact. Nevertheless, in my subsequent posts I was very clear on the distinction, as you can clearly see in the spoiler
On July 05 2013 10:27 Flyingdutchman wrote:+ Show Spoiler +Monetary policy definitively has long run effects, it comes down to a trade-off between employment and inflation. That is why it is important to have some sort of independence for Central banks with a clear mandate for price stability. If you do not know this you are either trolling or cherry picking what you learn about economics.
On July 06 2013 00:25 Flyingdutchman wrote:
When someone claims there are no long run consequences and then actually mention stagflation as a long run result of expansionary monetary policy, yiou know they are talking out of their ass. You want price stability because people don't get wages for their whole life, they have to save some of their income to live during their retirement. That will not go up with wages, and 25 years of of stable 2% inflation will halve the purchasing power of your savings. Without a clear and credible price stability goal will just fuck over future generations for a temorary short term gain. As you like to mention Friedman in this context, his take on this matter is quite clear, monetary policy will result in higher prices and no gains in structural employment rates. You are actually acknowlegding my point, and the fact that you think you are offering a rebuttle makes me realize how pointless it is to discuss economic theory with you.
You, however, failed to acknowledge that inflation is a consequence of monetary policy in the long run. Then you bring Milton Friedman into the discussion, who himself sees inflation as a disease.
On July 05 2013 09:22 WhiteDog wrote:
No ? Monetary policy is way more than manipulating supply and demand for your currency. And monetary policy is actually known for its lack of consequences in the long run. It gets its power from short term price rigidity.
which in turn makes your next statement rather silly
On July 05 2013 09:22 WhiteDog wrote:I'm glad you now know what are the effect of the monetary policy on real economy in the long run 
now onto the next part...
On July 05 2013 09:22 WhiteDog wrote:
No you can inflate the debt away, because inflation also mean more nominal revenue from tax (at the same taxation rate). In fact, according to an economist like J. Sapir, you can basically wipe out the entire european debt with a 7 to 10% inflation rate.
Unfortunately, Sapir mainly publishes in French, so I have no real way of going into his reasoning. In one of the few writings I found of him that were in English and was on the subject of Greek monetary policy, he completely disregarded expectations and central bank credibility. I found this odd, and it might explain why so many authors disagree with his stance on the matter (You already mentioned one, namely Milton Friedman).
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece? If you look at what is happening now, according to The IMF the competitiveness gap as measured in unit labour costs have declined by two-thirds since 2010. In my opinion that will help a lot more in getting on a higher growth path, and will not break multilateral negotiations down like currency wars tend to do. Lets see if you can connect the dots between the importance of multilateral negotiations and the Nash Equilibria paper you posted earlier.
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A greek exit from the euro would include, by definition, a partial or total default on euro-denominated government debt. No way they would be able to pay the burden on their current debt with a weaker currency (heck, they can barely do it anyway).
Weather they would renominate the remaining debt (along with any new debts) or keep it in euros I don't really know. It would be very difficult to finance their government spending internally, but international investors would be weary and the european community might not be too willing to offer help (especially if there's some sort of cascade effect on the eurozone involved).
Either way inflating the remaining and new debt away deliberately would probably not be in the cards. If the debt is kept in euros it would be practically impossible to inflate it away. If it's changed to drachma it would depend on a multitude of factors, such as debt maturity (short-term debt is difficult to inflate away because it has to be rolled over frequently at new interest rates) and type of interest rate (inflation-adjusted interest rates, which are also easier to sell, are impossible to inflate away). Inflating away debt is easy in stable economies with a long-term debt structure with predominantly fixed interest rates, which is not exactly the case here. Even if Greece forced it, with a short term debt structure it would have to consistently inflate the economy above market expectations, which would be a disaster for government credibility, compounding the greek government's difficulty getting itself financed. Plus, in this scenario, the Greek government is probably gonna be trying to avoid turning high inflation (which will be a given after the default) from becoming uncontrollable inflation anyway.
Which is not to say they shouldn't do the exit. The main point of exiting the euro would be to revalue their currency, not to control debt. But the inflation tradeoff is clear.
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On July 09 2013 00:40 Flyingdutchman wrote:Admittedly, I did not clarify long run and short run at first, but at that point I assumed you were aware of the fact. Nevertheless, in my subsequent posts I was very clear on the distinction, as you can clearly see in the spoiler Show nested quote +On July 05 2013 10:27 Flyingdutchman wrote:+ Show Spoiler +Monetary policy definitively has long run effects, it comes down to a trade-off between employment and inflation. That is why it is important to have some sort of independence for Central banks with a clear mandate for price stability. If you do not know this you are either trolling or cherry picking what you learn about economics.
On July 06 2013 00:25 Flyingdutchman wrote:
When someone claims there are no long run consequences and then actually mention stagflation as a long run result of expansionary monetary policy, yiou know they are talking out of their ass. You want price stability because people don't get wages for their whole life, they have to save some of their income to live during their retirement. That will not go up with wages, and 25 years of of stable 2% inflation will halve the purchasing power of your savings. Without a clear and credible price stability goal will just fuck over future generations for a temorary short term gain. As you like to mention Friedman in this context, his take on this matter is quite clear, monetary policy will result in higher prices and no gains in structural employment rates. You are actually acknowlegding my point, and the fact that you think you are offering a rebuttle makes me realize how pointless it is to discuss economic theory with you.
You, however, failed to acknowledge that inflation is a consequence of monetary policy in the long run. Then you bring Milton Friedman into the discussion, who himself sees inflation as a disease. Show nested quote +On July 05 2013 09:22 WhiteDog wrote:
No ? Monetary policy is way more than manipulating supply and demand for your currency. And monetary policy is actually known for its lack of consequences in the long run. It gets its power from short term price rigidity. which in turn makes your next statement rather silly Show nested quote +On July 05 2013 09:22 WhiteDog wrote:I'm glad you now know what are the effect of the monetary policy on real economy in the long run now onto the next part... Show nested quote +On July 05 2013 09:22 WhiteDog wrote:
No you can inflate the debt away, because inflation also mean more nominal revenue from tax (at the same taxation rate). In fact, according to an economist like J. Sapir, you can basically wipe out the entire european debt with a 7 to 10% inflation rate. Unfortunately, Sapir mainly publishes in French, so I have no real way of going into his reasoning. In one of the few writings I found of him that were in English and was on the subject of Greek monetary policy, he completely disregarded expectations and central bank credibility. I found this odd, and it might explain why so many authors disagree with his stance on the matter (You already mentioned one, namely Milton Friedman). I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece? If you look at what is happening now, according to The IMF the competitiveness gap as measured in unit labour costs have declined by two-thirds since 2010. In my opinion that will help a lot more in getting on a higher growth path, and will not break multilateral negotiations down like currency wars tend to do. Lets see if you can connect the dots between the importance of multilateral negotiations and the Nash Equilibria paper you posted earlier.
Inflation is not supposed to have any kind of impact on real economy in the long run if you take into consideration the rational anticipations of agents : every price will go up, every wages will go up, nothing will really change, aside from the fact that all savings will lost their value. According to someone Friedman, it should not have any impact on Greece competitivity.
Economists compare inflation to a tax that is inflicted upon the few people that have savings.
This is why economists considers that monetary policy has no effect on real economy in the long run : I'm not at all contradicting myself.
For keynesians, wages will not directly follow, which will push real wages down in the short run. For someone like Hayek consider that inflation can have inequal impact on prices (meaning it will only impact on some price and not on others).
On July 09 2013 01:09 Sbrubbles wrote:
A greek exit from the euro would include, by definition, a partial or total default on euro-denominated government debt. No way they would be able to pay the burden on their current debt with a weaker currency (heck, they can barely do it anyway).
Weather they would renominate the remaining debt (along with any new debts) or keep it in euros I don't really know. It would be very difficult to finance their government spending internally, but international investors would be weary and the european community might not be too willing to offer help (especially if there's some sort of cascade effect on the eurozone involved).
Either way inflating the remaining and new debt away deliberately would probably not be in the cards. If the debt is kept in euros it would be practically impossible to inflate it away. If it's changed to drachma it would depend on a multitude of factors, such as debt maturity (short-term debt is difficult to inflate away because it has to be rolled over frequently at new interest rates) and type of interest rate (inflation-adjusted interest rates, which are also easier to sell, are impossible to inflate away). Inflating away debt is easy in stable economies with a long-term debt structure with predominantly fixed interest rates, which is not exactly the case here. Even if Greece forced it, with a short term debt structure it would have to consistently inflate the economy above market expectations, which would be a disaster for government credibility, compounding the greek government's difficulty getting itself financed. Plus, in this scenario, the Greek government is probably gonna be trying to avoid turning high inflation (which will be a given after the default) from becoming uncontrollable inflation anyway.
Which is not to say they shouldn't do the exit. The main point of exiting the euro would be to revalue their currency, not to control debt. But the inflation tradeoff is clear.
I don't have any sources for that, but I'm pretty sure if Greece get out of the euro, the debt would instantly be changed to drachma.
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Call Centers Call On Multilingual Portuguese
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As Portugal's economy tanks, there's one glimmer of hope and economic growth: the outsourcing industry. Multinational companies are increasingly turning to Portugal as a cheap base for their call centers and customer service hotlines.
They're taking advantage of Portugal's low wages, high unemployment and talent for languages. The average salary for new college graduates in Portugal is about $775 a month. ...
Link
o.0
I hope that's a typo...
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It's 590ish eu in Greece so the Portugal dollar figure should be correct.
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On July 09 2013 02:47 Taguchi wrote:
It's 590ish eu in Greece so the Portugal dollar figure should be correct.
I know there's cost of living differences, but damn that's low.
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I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course. Wealth does not grow magically on trees or comes magically from QE, there are no free lunches so something has to give in.
Link
o.0
I hope that's a typo...
Dont think that is a typo, in europe we have no BART paying 75k$ or 60k euro a year to every highschool freshman.
Living expenses in portugal are not as high as in the usa though, so it is not as bad as it seems though they definatly are not overpaid.
"Inflation is not supposed to have any kind of impact on real economy in the long run if you take into consideration the rational anticipations of agents : every price will go up, every wages will go up, nothing will really change, aside from the fact that all savings will lost their value"
I dont know about this, inflation influences the way economic calculations are made and with that it influences the behaviour of all participants. Interest rates are always high when there is inflation, i guess this is because it is verry atractive to lend monney in an inflatory environment, both for consumption as well as for investments.
Personally i think in general inflation encourages disalocation of funds, manny investments wich would not be profitable in a non inflatory environment can become profitable in an inflatory environment, because the initial investment is put up in front,while the returns will come in later, affected by the inflation. High interest rates could maybe prevent this a little bit but the interest rates seem to always lag behind a little.
"I don't have any sources for that, but I'm pretty sure if Greece get out of the euro, the debt would instantly be changed to drachma"
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro.
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On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course. Wealth does not grow magically on trees or comes magically from QE, there are no free lunches so something has to give in.
Link
o.0
I hope that's a typo...
Dont think that is a typo, in europe we have no BART paying 75k$ or 60k euro a year to every highschool freshman.
Living expenses in portugal are not as high as in the usa though, so it is not as bad as it seems though they definatly are not overpaid.
"Inflation is not supposed to have any kind of impact on real economy in the long run if you take into consideration the rational anticipations of agents : every price will go up, every wages will go up, nothing will really change, aside from the fact that all savings will lost their value"
I dont know about this, inflation influences the way economic calculations are made and with that it influences the behaviour of all participants. Interest rates are always high when there is inflation, i guess this is because it is verry atractive to lend monney in an inflatory environment, both for consumption as well as for investments.
Personally i think in general inflation encourages disalocation of funds, manny investments wich would not be profitable in a non inflatory environment can become profitable in an inflatory environment, because the initial investment is put up in front,while the returns will come in later, affected by the inflation. High interest rates could maybe prevent this a little bit but the interest rates seem to always lag behind a little.
"I don't have any sources for that, but I'm pretty sure if Greece get out of the euro, the debt would instantly be changed to drachma"
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro.
Inflation doesn't negate the risks of lending, but makes real losses easier to accept. It's the same psychological barrier that comes into play with price and wage stickiness. Also, inflation protects against deflationary spiral. In a deflationary spiral, withholding money from the economy directly increases your wealth. For every dollar you can accrue, it instantly becomes more than a dollar.
And yes, going to a Drachma now would be a disaster. The debt will HAVE to be paid in Euros, and the exchange rate would be a reflection of how desirable Greek goods are. I'm going to take a guess and say "not very desirable" right now. This would probably mean hyperinflation in the short term.
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On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same.
Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it.
On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro.
In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced".
Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years.
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On July 09 2013 04:17 Sbrubbles wrote:Show nested quote +On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. Show nested quote +On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years.
If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system.
Some of this might be nonsense, so if any proper economist wants to correct me thats fine.
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On July 09 2013 01:26 WhiteDog wrote:
Inflation is not supposed to have any kind of impact on real economy in the long run if you take into consideration the rational anticipations of agents : every price will go up, every wages will go up, nothing will really change, aside from the fact that all savings will lost their value. According to someone Friedman, it should not have any impact on Greece competitivity.
Economists compare inflation to a tax that is inflicted upon the few people that have savings.
This is why economists considers that monetary policy has no effect on real economy in the long run : I'm not at all contradicting myself.
For keynesians, wages will not directly follow, which will push real wages down in the short run. For someone like Hayek consider that inflation can have inequal impact on prices (meaning it will only impact on some price and not on others).
Nothing would change if you look at Greece in isolation. But looking at it in isolation would be a fallacy. When has anyone inflated 180% debt-to-GDP rates away? Inflation will also make investors demand higher nominal returns on investment, it will also create electoral pressure to correct the purchasing power of the unfunded pensions on the government balance sheet. That will have to come out of the tax receipts of the youths of today, a group that is becoming smaller in comparison with the pensioners. In nominal terms the tax receipts will have gone up with higher wages and prices through the income tax and VAT respectively, the net result will be up to hindsight to determine. But it still represents a temporal income transfer from future generations to the current generation. Do you think that is fair to the unemployed youth of Greece? To transfer more of their future income to the current generation who are, in a democracy at least, accountable for the bad policy of the past decades? You can add the tax evasion issue to the whole 'who is picking up the bill' debacle Greece is going through right now. The people earning the most are the ones that are not paying their fair share, it is the simple earners that have to pick up the slack. This also leads to a more unequal distribution of wealth. Do you think the rich would hold onto their savings in Drachmes if the Greeks returned to that currency? No, they would not see their savings evaporate like you state, they would probably be buying a nice house in Spain or something.
You are very selective in what you respond to, I've touched on the subject of structural reforms to increase productivity multiple times already, yet you choose to ignore these comments completely in the resulting discussion. I realize now that you do not share my aversion to inflation, let's put that aside for now because it is going absolutely nowhere. I'll explain what I feel is a good development in the current situation. If a government doesn't have the option for the 'quick fix' of currency devaluation or deficit spending to create demand driven growth or artificially boost productivity they are more or less bound to improving the institutional quality of their economy. Thus creating what every economist worth his salt in growth accounting will tell you: sustainable technological growth, the true source of progress in welfare terms. It is not the easy route but it is the only way to even think about 'indefinite' sustained growth rates. This is not only a problem for Greece but the Eurozone as a whole imho. 3% deficit-to-GDP and 60% debt-to-gdp is only feasible if you have perpetual growth or some kind of mechanism that would enable or require a budget surplus once in a while. The former is very unlikely, unfortunately so is the latter.
The main difference I see in our viewpoints, in terms of what has to happen in the Greek economy itself, is that you are advocate to keep the a fundamentally rotten status quo intact where I see opportunities for real growth in the future (hopefully soon) and a more equal distribution of burdens and benefits.
I'm going to give you a little quote from Paul Krugman as a parting gift, although I do not see eye to eye with him on certain things, he is a brilliant economist:
"But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt."
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On July 09 2013 05:52 Crushinator wrote:Show nested quote +On July 09 2013 04:17 Sbrubbles wrote:On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years. If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system. Some of this might be nonsense, so if any proper economist wants to correct me thats fine.
Strict capital controls would have to be enacted to keep euros from leaving the country (like was done in Cyprus), at least in imediate term. Greeks would be forced to exchange their euros for the new currency by force of necessity. The bank system would probably have to be reworked, but I'm not really sure how that would go down (wouldn't be pretty, though).
Speculative attack on a currency usually means when the market figures out that a fixed-exchange rate is overvalued and the government is running low on foreign currency reserves, prompting domestic speculators to buy foreign currency to force the government to devalue the exchange rate. Moot point if you've got capital controls, though.
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On July 09 2013 07:02 Sbrubbles wrote:Show nested quote +On July 09 2013 05:52 Crushinator wrote:On July 09 2013 04:17 Sbrubbles wrote:On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years. If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system. Some of this might be nonsense, so if any proper economist wants to correct me thats fine. Strict capital controls would have to be enacted to keep euros from leaving the country (like was done in Cyprus), at least in imediate term. Greeks would be forced to exchange their euros for the new currency by force of necessity. The bank system would probably have to be reworked, but I'm not really sure how that would go down (wouldn't be pretty, though). Speculative attack on a currency usually means when the market figures out that a fixed-exchange rate is overvalued and the government is running low on foreign currency reserves, prompting domestic speculators to buy foreign currency to force the government to devalue the exchange rate. Moot point if you've got capital controls, though.
so how realistic would you think it will be to have a credible fiat currency after a default? Specifically, I mean how long will it take? 
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On July 09 2013 07:22 Flyingdutchman wrote:Show nested quote +On July 09 2013 07:02 Sbrubbles wrote:On July 09 2013 05:52 Crushinator wrote:On July 09 2013 04:17 Sbrubbles wrote:On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years. If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system. Some of this might be nonsense, so if any proper economist wants to correct me thats fine. Strict capital controls would have to be enacted to keep euros from leaving the country (like was done in Cyprus), at least in imediate term. Greeks would be forced to exchange their euros for the new currency by force of necessity. The bank system would probably have to be reworked, but I'm not really sure how that would go down (wouldn't be pretty, though). Speculative attack on a currency usually means when the market figures out that a fixed-exchange rate is overvalued and the government is running low on foreign currency reserves, prompting domestic speculators to buy foreign currency to force the government to devalue the exchange rate. Moot point if you've got capital controls, though. so how realistic would you think it will be to have a credible fiat currency after a default? Specifically, I mean how long will it take?
I'm not sure I understand what you mean. The only thing you really need to have a credible fiat currency is a government mandate. Or do you think people would go back to a barter economy or something?
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On July 09 2013 09:41 Sbrubbles wrote:Show nested quote +On July 09 2013 07:22 Flyingdutchman wrote:On July 09 2013 07:02 Sbrubbles wrote:On July 09 2013 05:52 Crushinator wrote:On July 09 2013 04:17 Sbrubbles wrote:On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years. If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system. Some of this might be nonsense, so if any proper economist wants to correct me thats fine. Strict capital controls would have to be enacted to keep euros from leaving the country (like was done in Cyprus), at least in imediate term. Greeks would be forced to exchange their euros for the new currency by force of necessity. The bank system would probably have to be reworked, but I'm not really sure how that would go down (wouldn't be pretty, though). Speculative attack on a currency usually means when the market figures out that a fixed-exchange rate is overvalued and the government is running low on foreign currency reserves, prompting domestic speculators to buy foreign currency to force the government to devalue the exchange rate. Moot point if you've got capital controls, though. so how realistic would you think it will be to have a credible fiat currency after a default? Specifically, I mean how long will it take? I'm not sure I understand what you mean. The only thing you really need to have a credible fiat currency is a government mandate. Or do you think people would go back to a barter economy or something?
When would risk premiums go down to 'normal' levels. I'm not sure about Greek people, but foreign investors will generally require higher compensation right? Right now their debt is being backed by a central bank that at least tries to seem credible.
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On July 09 2013 09:52 Flyingdutchman wrote:Show nested quote +On July 09 2013 09:41 Sbrubbles wrote:On July 09 2013 07:22 Flyingdutchman wrote:On July 09 2013 07:02 Sbrubbles wrote:On July 09 2013 05:52 Crushinator wrote:On July 09 2013 04:17 Sbrubbles wrote:On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years. If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system. Some of this might be nonsense, so if any proper economist wants to correct me thats fine. Strict capital controls would have to be enacted to keep euros from leaving the country (like was done in Cyprus), at least in imediate term. Greeks would be forced to exchange their euros for the new currency by force of necessity. The bank system would probably have to be reworked, but I'm not really sure how that would go down (wouldn't be pretty, though). Speculative attack on a currency usually means when the market figures out that a fixed-exchange rate is overvalued and the government is running low on foreign currency reserves, prompting domestic speculators to buy foreign currency to force the government to devalue the exchange rate. Moot point if you've got capital controls, though. so how realistic would you think it will be to have a credible fiat currency after a default? Specifically, I mean how long will it take? I'm not sure I understand what you mean. The only thing you really need to have a credible fiat currency is a government mandate. Or do you think people would go back to a barter economy or something? When would risk premiums go down to 'normal' levels. I'm not sure about Greek people, but foreign investors will generally require higher compensation right? Right now their debt is being backed by a central bank that at least tries to seem credible.
Risk premiums would be high as fuck for a long time, no question about that, but that's talking about government debt. Just because there's a serious risk of future default on government bonds doesn't mean the locals will stop using the currency. The greek people will still have to use something to buy stuff with and receive wages through (in this hypothetical scenario, it's not as if they have an alternative).
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On July 09 2013 10:02 Sbrubbles wrote:Show nested quote +On July 09 2013 09:52 Flyingdutchman wrote:On July 09 2013 09:41 Sbrubbles wrote:On July 09 2013 07:22 Flyingdutchman wrote:On July 09 2013 07:02 Sbrubbles wrote:On July 09 2013 05:52 Crushinator wrote:On July 09 2013 04:17 Sbrubbles wrote:On July 09 2013 03:11 Rassy wrote:
I can ask you one thing. Where inflation goes, wages will want to follow. How can this be any good for the competitiveness of Greece?
I imagine the trick will be to not allow wages to follow.
People are easier to accept inflation eating away their purchase power then they are willing to accept lower wages, the end result is the same off course.
What Greece is looking for in this case is not inflation, but currency devaluation, which does create competitiveness by brute-forcing national costs down relative to international costs. Initially, there would probably be a spike in cost of living and a shock to real wages, which would only be socially acceptable because unemployment is so high. This is a quicker and less costly process than lowering wages through years of low GDP output and high unemployment, even though, as you pointed out, the end result is the same. Inflation will come, of course, because eventually workers will eventually react, because the greek economy will have to reoganize and because the greek government is not only irresponsible, but even if it wasn't it would have to cope with difficulty borrowing, probably leading it to print money. But this inflation isn't 1-for-1 with the currency devaluation. This current situation is analogous to a country having an overvalued fixed exchange rate: letting the currency float will bring inflation, but the change in relative prices between foreign and domestic outpaces it. On July 09 2013 03:11 Rassy wrote:
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro. In what ways would Greece be "forced" to do anything in this situation? If they decide to leave the euro (which I really think would already include a partial default), shit will already be flying, so what's to stop them from doing whatever they feel is best? I understand they might choose do a controlled default and accept conditions on their default so that they maintain some access to foreign funds, but that can hardly be called "forced". Of course, my whole argument is theoretically speaking. I doubt any greek government would actually default and leave the euro. I have a firm belief in EU's capacity to muddle through this crisis for a couple more years. If greece defaults on debt, all of its banks will become insolvent, resulting in pretty much immediate bankruptcy. YOu need your banks to introduce a new currency, and the central bank must credibly be able to defend against speculative attacks, or they will be inviting them. Greeks must also be enticed to exchange their euros for the new currency, which no sane Greek will do without a credible banking system. Some of this might be nonsense, so if any proper economist wants to correct me thats fine. Strict capital controls would have to be enacted to keep euros from leaving the country (like was done in Cyprus), at least in imediate term. Greeks would be forced to exchange their euros for the new currency by force of necessity. The bank system would probably have to be reworked, but I'm not really sure how that would go down (wouldn't be pretty, though). Speculative attack on a currency usually means when the market figures out that a fixed-exchange rate is overvalued and the government is running low on foreign currency reserves, prompting domestic speculators to buy foreign currency to force the government to devalue the exchange rate. Moot point if you've got capital controls, though. so how realistic would you think it will be to have a credible fiat currency after a default? Specifically, I mean how long will it take? I'm not sure I understand what you mean. The only thing you really need to have a credible fiat currency is a government mandate. Or do you think people would go back to a barter economy or something? When would risk premiums go down to 'normal' levels. I'm not sure about Greek people, but foreign investors will generally require higher compensation right? Right now their debt is being backed by a central bank that at least tries to seem credible. Risk premiums would be high as fuck for a long time, no question about that, but that's talking about government debt. Just because there's a serious risk of future default on government bonds doesn't mean the locals will stop using the currency. The greek people will still have to use something to buy stuff with and receive wages through (in this hypothetical scenario, it's not as if they have an alternative).
What I'd like to find some insight to is how long the adjustment path will take after the shock of default, I can believe Greeks would find it hard to use an alternative currency, although it has happened before in other countries. I'm a bit worried about the hypothetical situation we are talking about, mainly because I don't think devaluations address the root cause of skewed terms of trade. They would need some form of investment in capital etc.
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"Inflation is not supposed to have any kind of impact on real economy in the long run if you take into consideration the rational anticipations of agents : every price will go up, every wages will go up, nothing will really change, aside from the fact that all savings will lost their value"
I dont know about this, inflation influences the way economic calculations are made and with that it influences the behaviour of all participants. Interest rates are always high when there is inflation, i guess this is because it is verry atractive to lend monney in an inflatory environment, both for consumption as well as for investments.
Personally i think in general inflation encourages disalocation of funds, manny investments wich would not be profitable in a non inflatory environment can become profitable in an inflatory environment, because the initial investment is put up in front,while the returns will come in later, affected by the inflation. High interest rates could maybe prevent this a little bit but the interest rates seem to always lag behind a little.
"I don't have any sources for that, but I'm pretty sure if Greece get out of the euro, the debt would instantly be changed to drachma"
My guess is that in this situation the debt would remain in euros, and that greece would be forced to buy euros for its drachmes at the forex markets to pay of its debt.
I dont think annyone who has lend monney to greece (amongst others manny central banks) would accept a conversion rate for drachme/euro as the one wich was used at the introduction of the euro.
Inflation influence the way people behave only if they don't know it's inflation. If they think it's a distorsion of relative prices, then they will act differently, but if they know it's inflation - a general and durable augmentation of all prices - they will act exactly the same because relative price will stay the same.
That's why we consider that if people are rational (or have rational expectations to take Friedman's language), and if the economy work correctly (something that "might" be true in the long run) they will eventually know (in the long run) it's "only" inflation and act the same as if the inflation never happened.
The exemple you take about investment show that very clearly. Every investment are made by calculating the net actual value, taking into consideration the inflation rate and the impact it has on "real value". So if people have rational expectations, if they "know" that inflation is coming and can quantify it, businessmen will take it into consideration through the net actual value and invest as if inflation was not there.
You are very selective in what you respond to, I've touched on the subject of structural reforms to increase productivity multiple times already, yet you choose to ignore these comments completely in the resulting discussion. I realize now that you do not share my aversion to inflation, let's put that aside for now because it is going absolutely nowhere. I'll explain what I feel is a good development in the current situation. If a government doesn't have the option for the 'quick fix' of currency devaluation or deficit spending to create demand driven growth or artificially boost productivity they are more or less bound to improving the institutional quality of their economy. Thus creating what every economist worth his salt in growth accounting will tell you: sustainable technological growth, the true source of progress in welfare terms. It is not the easy route but it is the only way to even think about 'indefinite' sustained growth rates. This is not only a problem for Greece but the Eurozone as a whole imho. 3% deficit-to-GDP and 60% debt-to-gdp is only feasible if you have perpetual growth or some kind of mechanism that would enable or require a budget surplus once in a while. The former is very unlikely, unfortunately so is the latter.
First, everything you point out is pro-cyclical : it reinforce the cycle we are currently living. A 1% less state in a situation of economical growth, where private investor can take the place of the said state investment, is not a real deal. But a 1% less state in a situation of crisis is nothing more than adding a more crisis to the crisis and putting Greece in the shit hole it is right now.
Secondly those structural reform are a mirage : there are no amount of "good reform" (aside from just putting down wage and letting Greek eat dirt) that could help the Greek being more competitive than the Germany in a 10 year time with that over evalued euro.
At some point you got to take the right step and face the fact that the euro is flawed.
I will take another exemple : in France, our labor productivity is way better than Germany's, yet our competitivity is not at their level. Why is that ? The question of productivity, competitivity and growth is so complex, if anybody had the answer to help a country get some of those with "intelligent reform", we would know it, considering what we did in under developped countries from 1950 to 1990 (and they had control over their currency).
What you point out is very interesting, but open for a LOT of discussion on how flawed our system (not the eu here, but more like our finance etc.) is and how that ideal is far from reality.
I will give you another exemple, during the last 10 years, we had the lowest interest rate possible in the entire world. At the same time, someone like Stiglitz (and I had personnal confirmation that it was right) pointed out that there are investment projects in our society with more than 40% return on capital, especially in the green economy.
So, considering all the cheap capital we have had for the last 10 years, considering the fact that there are field in our economy where one can invest and get more than 40% return on it, how is it possible that we've had almost no growth for the past 10 years (if you compare to the 30 glorious), a crisis, and that our economies are polluting more and more ?
So yes, structural reforms are needed (altho it doesn't mean less state to me, but a better state, and more state in some part of our economy) but those reforms are not the solution to Greece right now, they are a solution for every countries in the 10 to 50 years to come, to face the environmental problem and the economical problem we had since the 70ies (especially in Europe with a high unemployment rate) and they most certainly does not mean that the state should take less part in the economy, quite the opposite.
I'm going to give you a little quote from Paul Krugman as a parting gift, although I do not see eye to eye with him on certain things, he is a brilliant economist:
"But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt."
Yet Krugman is for the best but most unrealist solution of all : change the EU to be more or less like the US. Everybody would love that in theory, in practice you still ask Germans to pay Greece bill's for a little time (it will happen eventually, in one form or another).
By the way I'm not "for" inflation, I only said it was a possibility.
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On July 09 2013 18:06 WhiteDog wrote:
Because those structural reform are a mirage : there are no amount of "good reform" that could help the Greek being more competitive than the Germany in a 10 year time. Do you want to make Greece suffer ad vitam eternam ?
At some point you got to take the right step and face the fact that the euro is flawed.
I will take another exemple : in France, our labor productivity is way better than Germany's, yet our competitivity is not at their level. Why is that ? The question of productivity, competitivity and growth is so complex, if anybody had the answer to help a country get some of those with "intelligent reform", we would know it, considering what we did in under developped countries from 1950 to 1990.
The idea of sustainable growth is very good, but I could give you a class on sustainable growth model and you would see how unrealistic those models are.
I'd say the Greeks should worry about staying ahead of Zimbabwe. But all joking aside, they don't need to be more productive than Germany on a whole. The way I see it is that the current formal and informal institutional framework is not conductive for sustained growth in the long run.
The reason why I feel this is the time for reform is because reform is ultimately only really possible after a crisis, you cannot purely look at this in economical perspective without applying the political constraints to decision making. This does not only apply to Greece but the other countries in EU and the EU political framework as well. The EU monetary union certainly has flaws and they should be adressed, but that does not mean there isn't anything wrong in the long term strategy that the member countries are displaying. Wouldn't it be better if you go back and look at the replay of a game you lost to see where you could have done better instead of going on a forum and crying imba?
And when you talk about sustainable growth models, are you talking in the sense of endogenous growth models or sustainable as in natural resources? I was talking about endogenous growth, maybe I should have called it sustained instead of sustainable growth. Quite frankly I am quite surprised at how easy you dismiss things that do enable you to be 'right' yet you embrace things like the rational expectations hypothesis which can just as easily be dismissed when you look at empirical evidence.
You must not forget that economic research is done to better understand the sources of growth. They produce stylized facts or indicate some empirical issues that can be built upon to better understand all the complexities you mention. Things like the rational expectation hypothesis are assumptions made to try and explain behaviour in a model. Can you honestly say that you have worked with the mathematical models, as in doing them yourself? If not, it is understandable that you do not realize how much changing the assumptions will affect how well the model fits with what we can observe. It is therefore not very conductive to cherrypick certain assumptions (like the rational expectations hypothesis), when they happen to fit your world view in a theoretical sense and disregard them completely when they don't. That implies you are just trying to be right instead of building your understanding of the real world, which is ultimately the goal of economic academics.
Yet Krugman is for the best but most unrealist solution of all : change the EU to be exactly like the US. Everybody would love that in theory, in practice you still ask Germans to pay Greece bill's for a little time (it will happen eventually, in one form or another).
By the way I'm not "for" inflation, I only said it was a possibility.
Why wouldn't you be 'for' inflation if you really believe it is a neutral policy instrument that can solve the debt and deficit problem for Greece? That aside, the quote from Krugman is from 2003 and regarding US deficit spending to finance their war effort. He changed his stance on deficit spending and printing money in the current situation. The quote was primarily given due to the whole 'irresponsible governments' part. I'd suspect that his proposed solution to the political goal fits his view on sound economics, but does not necessarily imply he feels it would be the right policy goal to go for in an economical sense in the first place. In that regard he is mirroring what Friedman said, namely that the policy goal of a political and monetary union is more appropriate to the United states than Europe.
Edit: I see I have accidentally cut out a large part of your quote and have therefore not responded to any of it. I have no time left right now, I may come back to it if you want me to reply to something specifically.
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EPT
