An orderly and well designed Grexit may be beneficial

Comments on Barry Eichengreen "Path to Grexit tragedy paved by political incompetence", 29/06/2015

I agree with the author on the point that the current mess reflects the lack of leadership in all the major parties involved, though for quite different reasons. To me, the lack of political leadership lies in the lack of creative thinking in coming to a well considered and coordinated strategy for the Grexit, as opposed to the author's view that a Grexit will be disastrous. An orderly and well designed Grexit is likely to be beneficial to all major parties, because it can have all the advantages of within the euro zone, but have extra advantages of of more flexibility for Greece.

Both Greece and its creditors have had enough of the painful experiences and there should be a quick but orderly end to those pains.

There can be winners in the Grexit game

Comments on Antonio Muscatelli "Greece: why there can be no winners in the Grexit game", 21/06/2015

Some people simply assume that Greece has not prepared for default and it's consequences., including the author of this article. That is only an assumption. That assumption may or may not be true.

It is possible that the Greece government may have carefully analysed and considered the default option and prepared for it already, but does not want to say it so as to force a better outcome than default out of negotiations. Of course, I am speculating too and don't have any better information than the author had. So don't hold me for my speculation as a certainty.

I think in the long term, it seems that an orderly Greece exit from the euro zone may prove to be better for both itself and the rest of the euro zone as a whole. A Grexit would allow it the freedom to have its own currency and to devalue as a way to adjust to increase its international competitiveness, as opposed to the simple austerity adjustments it has had so far.

The stubbornness of many participants not to actively and positively to consider Grexit may prove to be a serious mistake that carries huge costs for both Greece and the others involved. It is regrettable and it can only be avoided after a real Grexit.

Euro zone may benefit from reforming the system

Comments on Oliver Marc Hartwich "Is Germany edging towards the exit", 2/05/2013, http://www.businessspectator.com.au/article/2013/5/2/economy/germany-edging-towards-exit

While the euro zone has experienced significant difficulties in the wake of the GFC, there are some measures that could be taken to overcome or at least lessen the shortcomings of the current euro zone design.

For example, one measure is to create a fixed rate of dual euro currencies that can provide the flexibility for one or more euro members to effectively devalue within the dual euro currency zone. This is because the most significant shortcomings of current single currency is the lack of flexibility of members to devalue to adjust to a less competitive situation they may be caught in.

Another second more effective measure is to issue euro bonds but charge different countries different rates according to its economic situations and macro economic management outcomes, so there is some accountability to avoid the moral hazard from arisen. At the same time, the other members will have some return or security for their collective guarantee of the euro bonds.

The second measure would utilise the strengths of the euro group of countries to lower costs of government funding, but still have disciplines in place for any national governments.

Nevertheless, all remedy measures need the courage of reforming the current system design, as opposed to stubbornly and stupidly stick with a flawed system design.

Moral hazard must be avoided in euro

Comments on Karen Maley "First shots in the battle for Spain?" 30/07/2012, http://www.businessspectator.com.au/bs.nsf/Article/European-crisis-ECB-Mario-Draghi-Spain-bailout-pd20120730-WNUMH?OpenDocument&src=sph&src=rot
It will not work as long as there are diverse interests and responsibilities that have been running so deep and wide between the Germans and the others.

It will be irresponsible to bail out some the troubled euro economies without them paying a real price for their troubles.

A middle way is to bail them out on the condition that they pay a higher than the ECB rate or possible potential euro bond rates to other more better shaped euro member economies.

But no one is saying that yet so far.

Until that is clear, then the euro is doomed to see some of its weak members to exit it.

Alternatively, a possible dual euro currency system may also work that would afford the flexibility of currency adjustment to their fallen international competitiveness.

A dual Euro currency is likely to work to save the Euro in the long run

Comments on Michael Pettis "Breaking up (the euro) is hard to do", 21/07/2012, http://www.businessspectator.com.au/bs.nsf/Article/European-debt-crisis-market-reaction-policymakers--pd20120718-WB9E7?OpenDocument&src=sph&src=rot
I personally believe in neither the conviction of a single currency Europe nor the complete break up of the Euro - something in the between is likely to emerge sometime in the next couple of years and to last.
Some problematic and weak Euro members may exit the Euro, but the majority may stay.
It is possible that instead of a single euro currency in the euro zone there might be 2 currencies, that is, a dual currency system to provide some flexibility.
At the same time, they may establish some mechanism that allows a common euro bond, but allow limited internal risk sharing and fiscal transfer, but each country will still be responsible for their own actions.

Temporary dual currency will save euro zone

Comments on Bill Evens “WEEKEND ECONOMIST: Full-scale fiscal union”, 29/01/2012, http://www.businessspectator.com.au/bs.nsf/Article/European-currency-fiscal-union-Germany-pd20120127-QW9YA?OpenDocument&src=rot

Quantitative easing means effectively fiscal transfer between good managed countries and poorly managed ones, so unless the former are comfortable with that kind of sacrifice, it is difficult to do in the euro zone where member countries are sovereign and independent.

It may be fair to make this kind of fiscal transfer explicit and let the recipient countries to shoulder some of the costs. It could be in terms of long terms loans from those better managed countries' governments.

Fiscal union is not absolutely necessary, if the euro zone allows a second currency when necessary such as the current situation with a fixed exchange rate with the current euro, so those countries badly in need of a competitive devaluation can adopt that second currency temporarily to boost their international competitiveness.

A dual currency monetary union when necessary is a solution to the currency economic and fiscal difficulties in the euro zone.

This alternative will be better than fiscal union where some nations will oppose it if there are better alternatives that are available.

This dual currency zone will not only retain all the advantages that the current euro have, but also have the necessary flexibility for some countries to adjust through an effective devaluation without the need to have politically and socially difficult nominal wage cuts.

New problems call for new thinking and innovation.

This kind of innovative thinking will save the euro without fiscal union.

International institutions should avoid moral hazards

Comments on Wolfgang Münchau “A G20 comedy of irrelevance”, 7/11/2011, http://www.businessspectator.com.au/bs.nsf/Article/G20-summit-eurozone-debt-crisis-Italy-bonds-ECB-EF-pd20111107-NCR2E?OpenDocument&src=mp

No matter what new world and regional institutions are set up, a key principle should be to avoid moral hazard problems.

People or countries with irresponsibility or mistakes must pay a price.

The IMF or ECB cannot be simply bail out countries without those countries required to pay a reasonable price for that bail out.

On the other hand, whoever contribute to bail out should be explicitly rewarded.

Without this kind of quasi market mechanism being introduced and effectively implemented, future failures cannot be minimised.

Italy woes raises the stakes of the euro crisis

Comments on Alan Kohler “Revenge of the golden days”, 7/11/2011, http://www.businessspectator.com.au/bs.nsf/Article/ECB-gold-G20-Cannes-IMF-debt-crisis-inflation-Berl-pd20111107-NCRPR?OpenDocument&src=sph&src=rot

As I have pointed out somewhere else, an orderly exit from the euro of some troubled members and allow them to have their own currencies and set fixed exchange rates to the euro, so they can have effective depreciations instead of deflation and so much painful adjustments.

Fixed exchange rates with the euro are to prevent what the Asia financial crisis from happening in the euro zone.

European leaders should realise that to keep the vanity of existing euro is costly, and more creative thinking is required to minimise the costs of adjustments.

The sooner they let this happen the better off they and the world will.

Any delay just simply exacerbate the problems.

Eurozone sovereign debt crisis: creative thinking badly needed

Comments on Christopher Findlay "European debt crisis: European fragmentation?" 6/11/2011, http://www.eastasiaforum.org/2011/11/06/european-debt-crisis-european-fragmentation/
Most mainstream economists and politicians tend to think in a flexible exchange rate regime as the best and that can sometimes become a barrier to creative thinking.
In the current situation, for example, Greece could exit the euro and start using a new national currency withou destined to dwonward currency spiral if it pegs to the euro with a certain and appropriate own currency real depreciation.
I don’t see it would be inevitable for what occurred in the Asian financial crisis in 1997 to repeat if Greece, or any small number of existing eurozone countries exit the euro.
A dual and pegged currency in the current eurozone would present a sensible adjustment from the current effectively fixed exchange rate equivalent from 1 to 1 to a x to 1. Essentially it would create a much more flexible adjustment mechanism without necessarily introducing increased risks.
Even from the mainstream economics point of view, it is not a retreat from its current state of euro to a worse regime!
Why don’t economists think in this way?

A mixed denomination is good for both sides

Comments on Robert Gottliebsen “France passes the baton to China”, 28/10/2011, http://www.businessspectator.com.au/bs.nsf/Article/France-China-US-EU-debt-deal-summit-loan-credit-cr-pd20111028-N2RD8?OpenDocument&src=sph&src=rot

If your information is correct, surely a mixed currency denomination required by the Chinese is fairer than using either currency alone.

The Chinese know its currency is rising in value, partly as international pressures. So if it is complete denominated in euro, then it is pretty hard to sell it to its people by the Chinese authority.

Most people understand why the Chinese are resisting rapid currency appreciation, because it will make huge losses due to its international assets or reserves, mostly in $US.

It is hypocritical of the US for it to pressure the Chinese to appreciate its currency against the $US without any mentioning of any considerations of the huge losses China will incur.

A plan to save euro and Europe

Comments on Philip Stephens “Wanted: one plan to save Europe”, 23/09/2011, http://www.businessspectator.com.au/bs.nsf/Article/Eurozone-debt-crisis-euro-currency-monetary-union--pd20110923-LY4T2?OpenDocument&src=rot

There is a need for both shorter and longer term plans. A short term plan could be a euro bond that has differential costs to different countries when they use it. The costs should be lower than a higher risk country's own bond implies but higher or lower than the costs of the euro bond. How much higher or lower should be determined by the member countries collectively.

A differential design imposes a real cost to those countries that have taken too much risks or ill disciplined fiscally that contributed to their current fiscal predicaments.

It will provide a solution to those countries risking of default with lower cost of financing.

It will also lower the costs of those other countries that bail out those high risk countries.

Politically it would be beneficial for both debt and credit countries within the euro zone.

A longer term plan could be further strengthening the original requirement by the euro constitution/agreement.

A really long term or permanent plan is fiscal integration. But it will take time for the conditions to be right.

A mechanism for a transfer union, the euro zone

Comments on KarenMaley "Will Merkel snap the olive branch?" 24/08/2011, http://www.businessspectator.com.au/bs.nsf/Article/Angela-Merkel-Greek-bailout-eurozone-debt-crisis-m-pd20110824-KZU3L?OpenDocument&emcontent_Maley&src=rot

Well, there should be some risk premium to be paid by higher risk members to lower risk members to reflect different levels of sovereign risks among the euro members, and as a measure of discipline for any careless and or imprudent policies by certain members.

It would also alleviate the concerns of lower risk and more prudent members, and as a reward or as a guarantee to them so that they will not completely sacrifice themselves for any imprudent members.

Of course, the premium paid by any member should be smaller than what it could get from capital markets for the mechanism to work effectively and in every member's interests.

Are the much mentioned euro bonds feasible?

Comments on Martin Sandbu "Shaking off Europe's German bonds", 18/08/2011, http://www.businessspectator.com.au/bs.nsf/Article/Eurozone-debt-crisis-eurobonds-markets-yields-Germ-pd20110817-KT3T8?OpenDocument&src=rot

While the argument that size matters is reasonable enough, the use of the US and Japan as example needs some caution, because each has its own advantages that are not just limited to their sizes.
Japan first. How much of the Japanese government bonds is has been bought and held by funds and people outside Japan? My answer is likely to be: not much and its share is small. If that answer is correct, then it shows the Japanese are different in some key aspects in terms of their portfolio investments in Japan and abroad, as opposed to most other people in the west. It is the Japanese they themselves buy their low yield government bonds.
Now the US. It is true that it has been the largest economy and also a very large government bonds market - that is, its size is large. However, its political influences and its role as the leader of the west world also have a significant effect beyond the size of its government bonds market.
Ignoring these characteristics of Japan and the US is likely to make the argument and conclusion questionable.

Of course, another consideration is whether the individual states of the USA need to issue their own bonds or can they use the federal government bonds to finance their own debts.

One needs also recognise the further difficulty that the euro zone or EU have a looser structure than the USA. Would the key members that are in a better state be willing to subsidise other members so explicitly?

Evolution and design - extreme forms and common grounds

Comments on Oliver Marc Hartwich “A fundamental Euro flaw”, 16/12/2010, http://www.businessspectator.com.au/bs.nsf/Article/European-Union-France-Germany-politics-pd20101214-C57AR?OpenDocument&src=rot

While the two schools of thought that Dr Oliver Marc Hartwich compared and contrasted may in their own extreme forms be incompatible with each other, there surely are some common grounds they can both work to reflect the different histories of human beings and societies.

There are obvious many differences between different societies that cannot and should not be ignored. However, how has each society developed or evolved in history to become today’s form?

There must have been many human designs in the long history of each society that exists today. Laws, for example, are designed and made by people.

So, it seems that both evolution and human designs must have both worked in the long historical process.

That is not to say that one can design anything that will work and can completely ignore the existing structures of the society.

It is important that one does not have to rely on any one of the two extreme forms of the two schools of thought, even though the euro may have been designed and implemented too hastily and too early.

Solutions to Euro zone woes

Comments on Bronwen Maddox “Rich states hit the bailout barrier”, 19/10/2010, http://www.theaustralian.com.au/news/opinion/rich-states-hit-the-bailout-barrier/story-e6frg6zo-1225940378228
There are two options for the Euro zone to resolve its current woes:

1. to kick some members out of the zone

2. to allow an effective internal tariff between some troubled members and the others to lower the costs for the former and raise their competitiveness within the zone.

A solution to some of current problems in euro zone

Comments on Bill Evans “Europe's dark clouds”, 19/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/WEEKEND-ECONOMIST-Europes-dark-clouds-pd20100618-6J9XJ?OpenDocument&src=sph
While having own currency for troubled members could be a solution, there is no need for a new currency or currencies for any euro members.

The euro zone could initiate intra-euro trade measures that have effective currency effects.

Such measures include allowing a troubled country to have a tariff on imports from other euro members and use the revenue to subsidize its exports.

It will be equivalent to own currency depreciation in a common currency area with no own currency.

Those trade measures, while inconsistent with WTO rules, should be only applied within the euro zone and should be acceptable to euro members as a better alternative to re-creating own currencies for some current euro members.

Those IOUs don't work

Comments on John Abernethy “A way Europe can survive”, 28/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/European-debt-crisis-pd20100527-5U5E8?OpenDocument&src=sph

Do any of the proposed inter-government and Central Bank IOUs which will be forgiven at a future date make the moral hazard issue between different European member countries more or less a problem?

It does not sound quite right from that point of view.

My solution to the current European economic and financial problems would be to allow intra-euro trade measures to have effective "devaluation" of some euro members.

Paul Krugman on euro union is wrong

Comments on Bronwen Maddox “Enmeshed in legal maze of the euro”, 21/05/2010, http://www.theaustralian.com.au/news/opinion/enmeshed-in-legal-maze-of-the-euro/story-e6frg6zo-1225869340719
It seems that there is an easy way to solve the problem associated with the euro monetary union and independent fiscal sovereign.

Any country in the eurozone does not have the freedom to devalue its currency to increase its international competitiveness.

However, it can use temporary trade policy to achieve what currency devaluation can achieve, that is, to temporarily tax on imports from the zone countries and subsidise its exports to those countries.

That is not quite completely equivalent to devaluation, but only relative to the zone members.

This practice is not in accordance with WTO rules. But monetary union is different too and has some characteristics of a "country".

As long as that temporary "trade policy" is internal to the eurozone and does not apply to other countries outside the eurozone, it should be regarded as acceptable.

Monetary union has its own advantages and limitations, as a result, some special public policies are also necessary.

A policy response to the Greek dilemma

In addition to my earlier comments (see here), I have developed another idea - a policy response if you like, related to the Greek dilemma. I include it below. Though it is a bit long, but the easiest way is through a temporary emergency regime of tariff and export subsidies within the eurozone only, contained in the bracket. See the following:

The current Greek economic problems associated with its fiscal deficits and sovereign debts raise an important question: how can it get out of the economic problem without own currency but a member of euro zone?

A normal economy has its own currency and can devalue its currency to export its way out of domestic troubles assuming external world is healthy enough to absorb that, but Greek does not have that luxury.

What a devaluation of own currency does is to lower the price of its products relative to that of other countries’, so they are cheaper internationally and demand for them increases and its demand for products overseas falls. This adjustment to currency and the chain reactions ensuing increase domestic employment and GDP in own currency and the economy is boosted, without domestic deflation, wage cuts and etc.

Theoretically, the same effects can be achieved through wage cuts and price falls of domestic products. But wages cuts are much more painful and politically difficult to do. Employees don’t like them.

There is very little difference between own currency devaluation and uniform wage cuts including a fall in interest rates and company profits. The main difference lies in the perception.

Practically, uniform reduction in wages, interests and wages are not easy to realise, because company profits may not fall or fall less than wage cuts. Also assets prices are another difficult issue. So there are more redistribution issues when “deflation” is concerned.

So what is the best strategy for Greek, if it continues to remain in euro?

Maybe one way is to apply a special tax on everything with the aim to have a uniform deflation without the need to cut wages and etc. The tax revenue can be used to provide subsidies to exports to lower prices.

(Maybe the best way is to tax imports and subsidise exports to change the relative prices. In the current Greek case, those trade duties should only apply to its trade with euro members only. That is not generally in accordance with WTO rules probably, but that could be a way reflecting the unavoidable costs of a monetary union with independent fiscal responsibilities like the euro zone without incurring violation of WTO rules with other non-euro countries.)

However, whether the Greek public will accept it or not depends largely on government communication of the issues involved and its rationale.

A question is: how to treat assets? Maybe, a way is to just tax transactions/sales of assets, in the same way as taxing wages, interests and profits.

Euro’s Greece rupture - what role has labour played?

Comments on David Vines “Greece and the vulnerability of the European Monetary Union”, 16/05/2010, http://www.eastasiaforum.org/2010/05/16/greece-and-the-vulnerability-of-the-european-monetary-union/

The above analysis has obviously some truth. However, it, as with many commentators and economists, relies on rigid of internal members, especially labour rigidity between member countries.

Leaving the conflict between monetary union and fiscal independence of Euro countries aside for the moment, why hasn't labour moved from other members to Germany in response to its higher wages, say flowing from its good fiscal and economic management?

If labour moves in response to higher wage opportunities, the market would have been able to gradually restore relative competitiveness between Euro member countries, at least in the longer run.

Why didn't that work? Because of cultural, language, or whatever reasons?

Understanding these factors may be helpful to the future and to future policy development for Euro.

Perhaps I should add that by labour move between countries I meant to include first of all the unemployed in the slower growing members.


Even by the employed labour, it should create more opportunities for the incumbent local unemployed ones to find jobs, at least easier.