Between Scylla and Charybdis - Grexit and The Euro
In Greek mythology, Scylla and Charybdis were sea monsters on opposite sides of the Strait of Messina, (Scylla, a rock shoal off the Italian mainland and Charybdis a whirlpool off the Scillian coast). Odysseus was forced to choose sides when he entered the strait; he opted to pass by Scylla and lose only a few sailors, rather than risk the loss of his entire ship in the whirlpool. Was this a mythological form of the prisoners’ dilemma?
By the time ink on your exam papers has dried the Eurozone may be in crisis. Grexit might grab the headlines on Monday but Spandex, Ex-It might be more significant later events if The Common Currency breaks up. Try ranking the least dangerous or more advantageous options from this short BBC extract below for economies by likelihood, whilst forming your judgement.
1. Grexit, Spandex, Ex It; countries could leave the Euro - requires planning secrecy over timing with exchange rate controls to stop capital outflow.
2. Slow devaluation but Greece, accompanied by wage deflation. A re-run of departures from The Gold Standard in the 1930s; or the more recent financial crises in Russia and Argentina, but accompanied by higher levels of external debt.
3. All return to national currencies.
4. How to redenominate currencies.
5. Split the eurozone in two to stop currency flight.
Some of the options are discussed here by Niall Fergusson. He points out that, a long term problem was setting up “monetary union without any of the other institutions of a federal state” which “is proving to be a disastrously unstable combination.“At present, the unemployment rates, growth rates and trade positions are diverging rather than converging undermining the stability of the Euro. “According to the IMF, GDP will contract this year by 4.7 percent in Greece, 3.3 percent in Portugal, 1.9 percent in Italy, and 1.8 percent in Spain. The unemployment rate in Spain is 24 percent, in Greece 22 percent, and in Portugal 14 percent. Public debt exceeds 100 percent of GDP in Greece, Ireland, Italy, and Portugal. These countries’ long-term interest rates are four or more times higher than Germany’s.”
Yesterday, the former Prime Minister Gordon Brown warned that larger EU states like France, Spain and Italy are more vulnerable to higher interest rates, and a significant loss of confidence, if Greece goes.
Even if Germany did stump up cash to bail out Southern Europe, these states still face significant difficulties paying for imported goods, and servicing government debts not just now, but in the future. Yet these same governments have conflicting pressures from voters to revive stagnant economies, to cut dole queues, to stabilise prices, to limit tax increases; yet they need to convince lenders that debts and interest on loans can be paid. There is no ideal solution to the Euro’s problems but you should try to consider what might happen to growth, to employment, to prices, to trade and economic stability not just in Europe but beyond.
This exam coaching and revision workshop is designed to support A2 Economics students in the final phase of their preparation for exams in June 2015. The workshop combines exam technique advice with coverage of our selection of core business economics (micro) and macroeconomics topics.