I have been thinking about the Greece "least bad" question for quite some time, but what brought about this post is a "by the editors" article on Bloomberg.
Please consider Greece’s Least Bad Option Looks to Be Internal Devaluation: View
Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.Bloomberg Right About One Point
We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.
....
Inside the system, the peripheral countries have learned a harsh lesson: They must hold growth in wages to the euro area’s rate of inflation plus any increase in national productivity. In countries such as Greece, this demands a new approach to wage bargaining by employers and unions. Overall, though, it should be no more difficult than managing a floating currency. And on this path the reward for success is greater: lower inflation rates and, with luck, faster economic growth.
None of this alters the fact that Greece, so slow to learn the new rules, would have been better off not joining the euro system in the first place. But it did join, and its best bet now is to make it work.
Bloomberg is right about one thing, that Greece should not be in the Eurozone. However, Spain, Portugal, Ireland, Italy, France, and Germany should not be in the Eurozone either.
In short, the Eurozone is a fatally flawed mechanism doomed to failure. No country should be in the Eurozone, as constructed.
Some may disagree with that prognosis, but even if they are correct, what is the likelihood that German voters and the German supreme court will ever accept the "transfer union" that can make the Euro ever work?
For the sake of argument let's assume 25%.
Now, in the current state of European politics (and more importantly Greek politics), what are the odds Greece can stick with the mandates set by the Troika?
Once again, for the sake of argument, let's assume 25%.
For the record, I think both of those are on the high side, but assuming both happen, the odds Greece stays in the Eurozone are .25 * .25 or 6.25%.
Regardless of how one calculates the odds, the same arguments that Bloomberg makes today could have been made (and were made by many parties) two years ago, a year ago, six months ago, and two months ago.
Water Under the Dam
At every critical juncture, the consequences for Greece to "stay in the Eurozone" have done nothing but get worse. The lesson here is the sooner a country tells the EMU to "go to hell", the better off the consequences.
That is all water under the dam. The question is "what to do now?"
Clearly if Greece is going to exit (and I think it will), the sooner the better. However, let's ponder the 6.25% chance that the Eurozone stays intact, including Greece.
Greek Exit Means Hyperinflation, Staying in a Decade's Long Depression
If Greece exits the Eurozone, I suspect Greece would enter a period of hyperinflation. The country and the Drachma will be ruined. On the other hand, if Greece stays in the Eurozone, it will face decades long austerity measures and a permanent depression for a decade.
At least in the former case, Greece may get this over and done with in a time-frame of 2-3 years.
Is that outcome worse than massive austerity measures and a permanent depression for a decade, in which Greek voters may decide at any time they have had enough?
Perspective of the EMU
From the perspective of Greece, the best approach was to exit 2 years ago, 1 year ago, six months ago and now.
Interestingly, the same applies for the rest of the Eurozone. Had Greece left two years ago the consequences on the Eurozone banking system may have been 40 billion Euros. In an attempt to prevent what now appears inevitable, the Troika responded with a 100 billion Euro bailout and now needs a second bailout of at least equal size.
Will another 100 billion Euro bailout help? 200 billion? 500 billion? How? And at whose expense?
Moreover, even if bailouts could in theory help, will Greece be able to stick with the austerity plan (and resultant depression) for a decade?
Conclusion
The worst option for Greece and the banks is for Greece to stay the course for years (as it has) then eventually give up (which it will).
The best option from the point of view of Greece (as well as the EMU) is for Greece to default and kiss the Eurozone goodbye, right now.
Unfortunately, misguided politicians, Eurocrats, ECB officials, and analysts have gotten in the way, with dire consequences for Greece, European banks, and the entire Eurozone.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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