Daily Commentary: On policy advocacy and forecasting in Greece’s exit from the euro zone

By Edward Harrison On May 16, 2012

About two years ago, I decided to limit the amount of policy advocacy I do around here and to focus mostly on forecasting. As I usually put it, I like write about what will happen and what policy makers will do rather than about what should happen and what policy makers should do. There are a lot of reasons for taking this tack but the chief one amongst them is that in times of crisis we as investors, business people and citizens care a lot more about the ‘will’ than the ‘should’.

But @yanisvaroufakis‘s post on the Grexit below tells you that Greece’s leaving would be catastrophic, a Grexit is a definite SHOULD NOT. I have a hard time finessing this one because I believe Greece’s situation in the euro zone is untenable economically and politically but that breaking up the euro zone will crystallize worst case outcomes for which we are not prepared.

I gotta tell you you. I am getting pretty sick of talking about Greece and the euro zone. But the reality is that this is the defining issue of the global economy right now. So I am forced to spend a lot of time on it here. The issue at hand is the how and why of Greece’s leaving the euro zone, the so-called Grexit.

Let’s be honest. I am a eurosceptic. If it were me making policy, I never would have formed the euro because I believe currency sovereignty is important. But now that we are here, breaking up in the middle of a debt crisis is not a good option. The right thing to do would be to see the euro zone through this via some ECB backstops balanced by some sovereign defaults and some bank recapitalisation balanced by some bank resolution and creditor haircuts. Afterwards, when growth was better, gauging the political will for further integration to support a single integration would decide who would leave the euro zone and how to break the euro apart. Greece should definitely leave at that point.

I know this is not the politically expedient choice. And I also know that this isn’t the way human psychology works. You need a crisis to break through institutional inertia. And we’re getting that!

So I present you the latest flood of news and try to interpret what it means in the context of the political and economic constraints.

Anyway, that’s my piece. Here are the links.

Greece

Greek Depositors Withdrew $898 Million From Banks Monday – WSJ.com

FT Alphaville » Plug-pulling in Athens

Cost of Greek exit from euro put at $1tn | Business | The Guardian

EU-Bericht: Illegale Einwanderer haben in Griechenland leichtes Spiel – International – Politik – Handelsblatt

EZB lässt einige griechische Banken fallen – Griechenland in der Krise – derStandard.at › Wirtschaft

Weisbrot and Krugman are Wrong: Greece cannot pull off an Argentina « Yanis Varoufakis

Goodbye Euro, Welcome Back Drachma | Debate Club | US News Opinion

Leaving the Euro May Be Better Than the Alternative – NYTimes.com

FT Alphaville » Greece: when the lights go out