August 09, 2013

Greece: “I am not going to pay you”. Europe: “Then you’re out of the eurozone”. Greece: “So what?"

Sir, Sir Samuel Brittan writes that “The theory behind the euro was that the single currency would act as a harmonizing force”, “Why the eurozone will come apart sooner or later”, August 9.

I do not agree. To refresh my memory I went back to an article I wrote on the eve of the euro titles “Burning the bridges in Europe”. Reading it I conclude that, as I saw it then, it was very little about harmonizing something, and a lot about forcing Europe on Europe.

Brittan also believes that the most likely outcome is for “one or more of the peripherals to leave the eurozone” and links it to when Argentina “severed a supposedly unbreakable link with the US dollar”.

Again, I do not agree. Argentina was using a peso convertible to dollars, but the sustainable seigniorage value of for instance a new Drachma, should be so low that at least Greece would prefer to keep on using the euro, without asking for permission, which it does not have to do, just like Ecuador uses the US dollar without asking the US for permission.

PS. And by the way remember that the Greece mess was mostly caused by the Basel Committee, and European bank regulators, who approved that banks could lend to Greece against only 1.6 percent in capital, meaning allowing these to leverage their bank-equity, when lending to Greece, a mind-boggling 62.5 times to 1. Neither the banks, like those of Cyprus, nor Greece, could or should have been expected to be able to resist such temptations.