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Thursday, May 24, 2012

The drachma is not catastrophe

As for the Euro, on the other hand.... Ambrose Evans-Pritchard contemplates the upcoming Greek exit from the Euro:
The danger for Euroland is slow contagion later once the sanctity of monetary union is violated, compounding the underlying crisis as Portugal, Spain, and Italy sink deeper into (policy-driven) debt-deflation.

Fitch boss David Riley told a banking form in the City that the Greek saga is "knocking down the central pillars underpinning monetary union".

EU leaders said successively:

1) There would be no bail-outs.

2) Sovereign defaults inside EMU were inconceivable.

3) EMU exit was out of the question, lunatic, and so forth.

Every one of these claims has been shown to be untrue....

Mr Papademos said withdrawal from the euro would be "catastrophic" for Greece. This is a religious incantation, or possibly just a threat. It would be catastrophic if EU leaders and the IMF chose to make it catastrophic. That is a political decision. Such shroud-waving borders on political blackmail.

We hear this sort of language before every devaluation crisis. Argentina in 2001-2002, Mexico's Tequila crisis in 1994-1995, the East Asian crisis in 1997-1998, not to mention countless others through history, including the UK's two liberations from dysfunctional fixed-exchange systems in 1931 and 1992.
The reality is that the Euro is intrinsically catastrophic and has been from the start. It's never been about the economics, but rather, providing a first step towards a single unified European state of the sort previously constructed by Charlemagne, Napoleon, and Hitler. And, like its three predecessors, it is rapidly collapsing, albeit under the weight of its structural inconsistencies rather than any external pressures. Pritchard has made some serious blunders along the way, mostly because he made the mistake of paying too much attention to the mainstream economic experts, but he is entirely correct to remark that "Remaining in the euro is demonstrably catastrophic already."

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