Jens Nordvig from Nomura has a VoxEU post on the subject. Here are his conclusions:
Policymakers cannot claim victory in the Eurozone crisis just yet. The ECB’s outright monetary transactions program has helped to reduce funding risks for sovereigns. Linked to this, the risk of disorderly default – and exit from the Eurozone – has also been reduced. But political risk remains a serious concern, and this risk cannot be addressed through liberal liquidity provisions. Moreover, continued weak growth in the region has the potential to fuel populist sentiment, implying that political risk may be rising.
With respect to Greece, the opinion polls point to a highly unstable political climate. This indicates that early elections, should they be called, could cause a dramatic resurfacing of Eurozone exit fears.
Importantly, political risks are not confined to Greece, as demonstrated by recent developments in Italy. The conclusion is that ‘political events’ are set to increasingly drive Eurozone asset prices. Thus, we are in a different situation to where we were in July 2012, when the ECB had yet to articulate a mechanism to contain sovereign funding risk. Since political risk is hard to quantify for investors, this creates a persistent sense of unease. The implication is that Eurozone financial assets will continue to embed significant risk premiums in 2013 and beyond.
I do think it’s a good idea for Greece to leave (as I’ve written previously). One thing to add now is Greece’s bonds. Joseph Cotterill over at FT AV mentioned this last week, but when thinking about political instability I think it’ll be increasingly important: If all bonds are owned by official institutions (ECB, IMF) and eeevil London hedge funds, the political risk increases (since no constituents really have skin in the game re: bond ownership).
Forget about economics — FT AV
Should Greece just leave the EZ? – Hinrichsen, Guldberg & Kloster (2012)
I haven’t written much in a long time. It might change, so I thought I’d start by uploading my paper on whether Greece should leave the EZ for its own sake. The paper, co-written with two class mates, is from May, so some of the numbers might be a little old, but I think the conclusion is still valid.
Two caveats. 1) We only looked at it from Greece’s point of view, i.e. we didn’t include considerations on whether it would be good for the euro area as a whole, and 2) the first 8 pages (and a few in the middle) are methodological requirements (the paper was written as part of my bachelor), so if you don’t like philosophy of science — just go to page 8. Click to get the paper:
It might be relevant in the next year or so.
One of the things we’re doing for a paper is to compare monetary policy in the euro zone with what would, ideally, have happened in Greece. Applying a simple Taylor Rule — as scheduled out by Fernanda Nechio — with the average yearly ECB rate we get that, leading up to the crisis, ECB’s interest rate policy was way too loose to curb inflation in Greece. The NAIRU we used was from OECD’s database. Here’s the graph:
The monetary policy of the ECB was way too loose for a long time. The NAIRU of Greece is insanely high (often above 10 %), thus making inflation more of an issue (in this model). It is one of the big problems now: Competitiveness. Greek wages rose too much (like Spain) and they are now less productive, needing huge deflation relative to the rest of the euro.
And yes, ECB has a single mandate, making it all the more troublesome that monetary policy was not curbing inflation, at least in Greece.
A couple of months ago, Greek “expert” Tom Kristensen was on TV2 News talking nonsense. I know, because I wrote about it at the time.
Now a little Monday-morning quarterbacking. How is that banking crisis going that you ensured would come if Greece defaulted? Well, did anyone notice?
Now, I have a problem, because I can’t show you the clip. I’d like to, because he has been on tv claiming all kinds of nonsense at least two times in regard to the financial troubles of Greece. TV2 News — please upload video clips like other news organizations so we can hold people accountable for what they say.
Too many people get to talk without being called on the facts.