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Don't worry about Italy. It has a stable and serious political tradition, has no recent history of extremism, and has in its PM a sober man with single-minded focus on his job. What could possibly go wrong?

Great analysis Livio.

The motivation for the referendum looks to be entirely driven by domestic politics. The latest bailout deal calls for the loss of Greek sovereignty as the Troika (EU, ECB and IMF inspectors) were being invited in to oversee Greek finance and privatization efforts. Papandreou knew that he would have a difficult time passing the deal, let alone implementing it. His previous efforts to form a unity government had been thwarted with the opposition leader calling for new elections and renegotiation of all deals with the EU. So Papandreou played the referendum card, in an effort to crystalize the choice that faces Greece, that is: proceed with the bailout deal and reform, or get out.

Papandreou is probably toast. Venizelos , the number 2 man in PASOK (the ruling party), broke rank with Papandreou and forced him to back down from the referendum call. Venizelos, after a bruising session with European bankers, apparently concluded that it was a far too high stakes game to actually hold a referendum. Either that, or he realized that is was a great opportunity to dump the leader and take his place. With this split in the party, expect Papandreou to resign and new elections to be held by the spring.

Contrary to your second last point, it appears that the politicians of Greece are far more interested in power and becoming the Prime Minister, than they are in actually leading Greece out of this crisis.

And firing your top generals. So the EU think there is a risk of a coup and soften their absurd demands. Greeks have been doing politics since 1500 BC when the Gauls and Germans were still trying to master the intricacies of building a mud hut...

The problem with all this is that Greece does need to leave the Euro. Canada does understand problematically large currency zones. Greece is Nova Scotia. The only way that the Euro survives is by large numbers of Greeks moving to Germany. Any bets on that happening?

I agree with everything said thus far. But Jim - lets go further. None of the four countries of southern Europe are competitive with the countries of northern Europe according to Eurostats and ECB data (and working papers published). The GIPS (or PIGS) countries are approximately 35% less competitive. The austerity is not enough. It will require the restructuring of these economies - their very way of life - that has met such resistance.

In an Op-Ed in FT 3 days ago, (Papandreou will fall but he is right to take this gamble, Stathis Kalyvas), a Greek-American prof at Yale argued that Papandreou supported the austerity program (cutting public servants and their wages) but did not support the restructuring to privatize hundreds of Govt corporations, eliminate the closed guilds for many professions restricting entry and opening up the economy to foreign capital and foreign firms (said system established by his Grandpapa and Dad and is the system, he argued, that both PASOK and New Democracy parties are completely dependent on).

In other words, we will cut as much as you demand - but we will not change the underlying structure that is causing the problems in the first place.

And to be provocative, why should the northern countries impose their way of life on the Greeks, Italians etc. Why not allow and encourage them to exit to their own currencies or a southern Euro (as proposed by Hans Olaf Henkel(?) former President of the German Employers Association).

Yes, the currency will depreciate - that is what should happen - as they are 30% to 35% less competitive - but with IMF help can then develop with a depreciated currency - without Germans et al telling them what to do.

Finally, is not the much larger issue for all western countries that we now have a response to Krugman et al concerning demands that we stimulate the economy with more borrowed money. The answer being: yes of course we can, but one day, some countries may find they are dependent on foreigners to bail them out telling you what to do. And I am not even referring to the worst case of Greece. After all, Italy agreed yesterday to IMF supervision.

@ Jim Rootham

From Wikipedia Greeks in Germany "Since the first Greek school built in 1960 and up until 1990, over 1 million Greeks had immigrated to Germany. About 800,000 of those Greeks had after either a long-term or a short term stay had gone back to Greece."

The problem isn't getting Greeks to move to Germany, the problem is getting them to stay there :)

Seriously now, there are approximately 400,000 Greeks in Germany today, likely more than there are in Canada. Greeks have always emigrated from their homeland, from ancient times. This exodus stopped in the 1990s, but from what I hear from relatives, it is about to start up again. The youth of Greece typically learn English and German in school, so emigration is plausible.

So what's going to happen?

I predict a major crisis, with a run on Greek banks as people become fearful of an exit from the Euro and try to put their money some place where it will remain in Euros. With the banks shut, a new currency will be introduced, deposits in Greek banks will be converted to it, and Greece will be out of the Euro zone.

Greece will still, of course, be unable to pay its debts which are in Euros. It will default at least partially and this will create a wider bank crisis. But German banks have much more political clout in Germany than the Greek government, so can probably get a bail-out. Maybe the ECB will even decide, belatedly, that it actually can act as a lender of last resort when German banks, not Greek citizens, are in trouble.

I'm not going to try to predict whether or not this will spread beyond Greece. So much depends on whether or not what happens to Greece scares some sense into people.

But I think this will not be a very bad outcome for Greece. With its own currency at a reasonable value and its own central bank, it will again be able to run monetary policy to minimize unemployment. After a period of chaos and unemployment, I expect better times for Greece, although not necessarily for the rest of Europe if it continues down the austerity trail.

That's my prediction. What's yours?

Now that the possibility of a referendum and the option of leaving the Euro has been voiced (and voiced by France and Germany no less), it might be difficult to put that genie back in the bottle. With Greece heading into a period of political instability accompanied by another round of austerity, a referendum on leaving the Euro will undoubtedly be presented to the people. Many will jump at the opportunity to escape their nation's debt through default.

But I expect that Europe will be prepared for this eventuality. Arguably the EFSF was created for this specific outcome, to firewall the rest of Europe from Greece's default and ejection from the Euro. The real question is what happens to Italy?


Are the Germans up to tolerating Maritime Provinces levels of emigration?

That's like 75% of the 20-30 year olds. At this point there is (at a guess after looking at some demographics) about a million Greeks who will want to leave now and ~100,000 more every year.

Is this viable?

"Irresponsible short-term behavior on the part of Greece designed to evade responsibility for its financial mess or a calculated stratagem?"

Sounds like a false dichotomy to me. Do the German and others bear no responsibility for the financial mess that Greece finds itself in? Are referenda irresponsible?

Jacques Rene Giguere: "Greeks have been doing politics since 1500 BC when the Gauls and Germans were still trying to master the intricacies of building a mud hut..."

Around the time that Stonehenge was completed. :)


As long as both Greece and Germany remain part of the EU, Greeks have the legal right to live and work in Germany. Germany has always been comparatively unwelcoming to immigrants, as is evidenced by most Greeks who have gone to Germany returning. It is unclear if this will completely change in the future, but EU citizenship does facilitate the migration of workers.

An important factor will be the strength of the German economy. If there are jobs to be filled, Germany will be happy welcoming guest workers from other EU nations. For instance, Greeks are likely preferred to Turks and probably to Russians.

I appreciate Papandreou's bravery in calling for a referendum. He needed a grand gesture to bring the Greek Parliament and a working majority of Greeks onside to the austerity plan. Parliament and the people needed to see the teeth of the Troika and see what was over the cliff edge. It was a huge gamble but it worked.

It was a courageous decision in the "Yes, Minister" sense of the word in that it will like cost Mr. Papandreou his career and his party the next election.

It's also a corollary of Nick's misguided claim of Chuck Norris-like central banks. As the Federal Reserve Act shows, the powers of central banks are not unlimited, nor are they omnipotent. The real power is and always was not at the Central Bank's director's table, but in Parliament. It's with the people who write the laws and collect the taxes, the people who wield the real authority of the state.

The Central Bank is merely a tool of the state to carry out a limited and legally circumscribed set of functions. In the current economic environment we have repeatedly pushed up against the legal and procedural limit of what central banks can do. It should be clear to everyone that the real power and the real solution lies in those with the constitutional power to spend money, collect taxes, issue debt and enact laws.

Economists like to minimize the political aspect of macro. They don't want it to be debated in Parliament, they want it just adopted by the central bank. It should be clear to everyone that we will get nowhere until we realize that the real power is political, that money and macro are always and everywhere a political phenomenon.

When we need a solution we need to go to the people with the real authority, not the central bankers who are bound by their own charters and statutes.

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