But Greece still does have a central bank. My understanding is that much of the day to day business of central banking in Europe is carried out by the national central banks. In principle, even if Greek banks can't acquire settlement assets by borrowing from the ECB, they can still borrow from the Greek central bank. This doesn't help with payments to the rest of Europe, since reserve balances at the Greek central bank won't be accepted elsewhere. But I don't see why the Greek central bank can't keep the payments system working within Greece itself. If the Greek central bank is willing to provide liquidity on the same terms as the ECB, what's going to force the Greek banks to shut down? It's not as though there's any Europe-wide bank regulator that can do it.
In a sense, this is a kind of soft exit, since there will now be a Greek euro that is not freely convertible into a non-Greek euro. But I don't see why it has to be catastrophic or irreversible. Transactions within Greece can continue as before. And for routine trade it might not make much difference either, since the majority of Greek imports come from outside the EU. Where it would make a difference is precisely that it would prevent Greek depositors from moving their funds out of the country. [1] In effect, by cutting Greece off from the European interbank payment system, the ECB will be imposing capital controls on Greece's behalf. You could even say that, if the threat of cutting off liquidity support can trigger a run on Greek banks, actually doing so will ensure that there isn't one.…Neil Wilson suggested something similar in a comment here.
The Slack Wire
What If the ECB Pulls the Trigger?
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York
17 comments:
This just seems like another way of leaving the Eurozone. The national central banks are part of the ECB system. If Greece's begins conducting its own independent monetary policy, won't they be booted?
That's a choice that the eurocrats would have to make.
According to Yanis, if Greece is out of the euro, the euro experiment is finished. Maybe bluff, but are the eurocrats willing to find out?
Now we are getting into the game theoretical aspects of it.
The problem is that the IMF, ECB and EU bailed out German and Greek banks, speculators and industry and bought 240 billion Euro of greek debt.
No one wanted to characterize the bailouts as bank bailouts after the backlash in the USofA and Ireland. So they called the bailouts "Greek bailouts" and implied the money was going to be used to support the greek state and now they want Greeks to pay for the bank bailouts.
So what happens if the Greeks try to continue to use the Euro, or their banks try to continue to transact with other European institutions after they default? They can't treat the IMF or EU as special, everyone has to lose equally and that will cause Merkel to probably lose an election.
The problem isn't really monetary, everyone, Greece especially knows their power to mint coin and their power. Varoufakis well knows. The problems are political, at the level we are talking about, the Greeks don't want to completely piss off the neighbors, they want an amicable divorce with a good split of assets and visitation rights with the kids. They negotiations are in the poker phase on who is going to be left holding the ball and NOT over what is possible in theory. When the greeks trot out the nuclear option, everyone locks up and they end up with nothing. Best to negotiate and play ball to get something for the moment, keep the membership in the EU. It is valuable even if the currency is not. Ultimately, they aren't paying for the "Greek bailouts" but no reason to become an international pariah state and have assets seized around the globe by creditors and then have to spend decades trying to re-create the relationships with Europe.
Kind of interesting, don't you think, that a free floating sovereign currency is described as 'capital controls'.
Interesting how people can start to see that control function in terms of Greece leaving the Euro, or Scotland leaving the Pound - but seem to struggle to see it in the sovereign currencies (Dollar, Peso, etc) that already exist.
And for routine trade it might not make much difference either, since the majority of Greek imports come from outside the EU
It would make a big difference - exporters to Greece would not be willing to accept a "Greek euro" that is not convertible into the real euro.
Greece would be cut off from imports from both Europe and the rest of the world. A truly catastrophic outcome.
"It would make a big difference - exporters to Greece would not be willing to accept a "Greek euro" that is not convertible into the real euro."
Where else are they going to sell their goods and services then? Mars?
I find this attitude incomprehensible and certainly it is not displayed by any businessman I'm aware of.
Exporters need to export, and if you don't export to the Greeks, then somebody will spot an opportunity and do it instead. Hence why the Argentinians couldn't get on a plane to Moscow fast enough once the EU imposed sanctions.
Export markets are not easy to come by, and nobody is going to give up market share willingly if they can lobby their government and/or banking system to create the necessary 'liquidity operations' to ensure that everybody gets the right sort of money.
Those liquidity operations are standard fare in serious exporting nations - because they are essentially free to the central bank.
It's only truly neo-liberal idiots like the Swiss and the ECB that are prepared to cut off their nose to spite their face. Other countries are more pragmatic.
I've been encountering that line of thought recently. When discussing suspension of rouble convertibility a commenter replied this would be a capital control and all countries woth capital controls suffer terribly. It's always interesting when a free-marketeer claims reducing government footprint in a market is really a form of government interference.
I'd point out that the shelves were fully stocked in Somalia, where no functioning government existed and pirates roved the country. Every major brand of consumer good from around the world was readily available.
If merchants could find a way to sell their goods there, they will find a way to get their wares into Greece.
The problem is that risks cost money to bear. Financial markets cost less than banks cost less than merchant banks cost less than merchants less than smugglers. There is a reason that we subsidize banks and financial markets. There is a reason that Greeks were willing to make some amount of sacrifice to stay in the common Euro.
The costs clearly have exceeded any reasonable level now but there is a benefit to having open markets and lower transaction costs with a shared currency. If the Germans were more flexible in allowing the Greeks more time to reform, maybe a few decades to raise productivity with only say 10-12% unemployment, I'd think there would, even today, be wide support for staying in the Euro.
"but there is a benefit to having open markets and lower transaction costs with a shared currency"
Such as?
"allowing the Greeks more time to reform, maybe a few decades to raise productivity with only say 10-12% unemployment"
A few decades with 10 to 12% of the working population out of work? That's a punishing thought.
Hence why the Argentinians couldn't get on a plane to Moscow fast enough once the EU imposed sanctions
But the Russians can pay in dollars or even rubles, a currency that has an exchange rate and can be traded for other convertible currencies.
That would definitely not be the case with a so-called the "Greek euro".
If the ECB expelled Greece from TARGET2, the country would have to re-introduce the drachma as quickly as possible, and have it priced and traded in terms of other currencies.
Only then will it be able to trade normally with the rest of the world.
"Such as"
lower prices. Ask an Australian about the Australia tax. Or a Brit about "Rip-Off Britain" It's what happens when you are removed from other markets. In the case of Australia, the distances are physical and allow companies to get away with murder. But the distances are more commonly regulatory and legal and than being across the globe. The old days of Europe where there was constant strife and imbalance between neighbors due to wild gyrations in money weren't the glory days by any means. MMT downplays the effect of exchange rates on consumers while at the same time emphasizing their ability to bring balance. They are both true to an extent but markets are brutal in bringing balance.
Tom what about beloved "democracy"?
The people there want in.
So we ignore this?
This is hypocrisy.
Exporters need to export, and if you don't export to the Greeks, then somebody will spot an opportunity and do it instead. Hence why the Argentinians couldn't get on a plane to Moscow fast enough once the EU imposed sanctions.
This is exactly what the US is concerned about — Greece leaving the Atlantic Alliance and joining BRICS. China is building not only an intercontinental Silk Road by high speed rail, but also a maritime one for huge container ships.
This is a reason that the US now moving against Russia with the plan of taking control of Russia to put NATO on China's Western border, with the Seventh Fleet on the eastern border. China is, of course, completely aware of this.
But the Russians can pay in dollars or even rubles, a currency that has an exchange rate and can be traded for other convertible currencies.
That would definitely not be the case with a so-called the "Greek euro".
Russia has goods that exporting countries want, chiefly arms on the par with Western arm manufacturers that are either more expensive or not permitted to sell to them. Russia also has natural resources. Russia is now doing deals using the currency exchanges, with other countries that amount to barter deals and avoiding the use of USD.
The question is what Greece has to offer that other countries want enough to accept Greek currency for, which is really only useful to them in paying for purchases in Greece.
Tom what about beloved "democracy"?
The people there want in.
So we ignore this?
This is hypocrisy.
Notice that Syriza has not threatened to leave the euro but implies that if that happens the eurocrats will be the initiators of it. Syriza was elected on a platform of anti-austerity, anti-neoliberalism, and domestic reform including anti-corruption (finally tax the rich who have consistently avoided paying taxes).
The Greek people seem to be wildly pleased with the stance that Syriza is taking publicly and I don't think that many people can follow the game strategy that Yanis is playing. Kaletsky seems to have missed it, for example.
So far the eurocrats strategy is to issue ultimatums (following the favorite US strategy), which Syriza is responding to in kind after Yanis presented a workable plan to restructure Greek debt that the eurocrats rejected.
Yowser. It's all too much for me to contemplate sometimes.
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