the mess

When Greece was admitted into the EU about a decade ago, there were suspicions that the country had fudged its economic numbers a bit to meet the minimum criteria for entry. But the EU chose to look the other way.  In the middle of the decade, more evidence of cheating was uncovered, but again the EU chose to look the other way.

the discovery

Last year, after a change of government, the new administration confirmed that Greece had indeed been cooking the books in its reports to the EU , to its citizens and to the outside world, in a major way for years.

With a lag of some months, these revelations have sparked the currency and bond crisis, akin to the Asian developing market worries of 1997, that we are in now.

positives?

We all know the negatives.  Are there any positives to be taken from the situation?  I think so.  Specifically,

1.  Better now than a year ago, when the whole world was falling apart.

2.  It appears that the EU is finally going to address the Greece issue instead of papering it over.  Germany, ever the economic policeman of Europe, seems unwilling to move down a slippery slope of denial and compromise. And even if it were, world government bond markets will no longer allow that to happen.  It’s unclear what the ultimate outcome for Greece will be—the two polar cases are its leaving the EU and and an IMF-led policy overhaul—but some thing definitive will happen.

3.  The Greece situation probably puts an end for a long while to the idea that the euro can replace the dollar as the world’s reserve currency, or even serve as a viable second team substitute.  This probably buys some time for the US to get its own fiscal house in order, but I think that’s a mixed blessing.

The implication for China, which is already offloading dollars through acquisitions and foreign aid as fast as it can, of the unsuitability of the euro as a home for its foreign currency reserves is to push harder to advance the renminbi as a medium for inernational trade.

3.  Germany vs. Greece can easily be seen as the pattern for the way a possible confrontation years down the road between China and the US might develop.   As such, it may serve as a salutary warning to the US.  I would particularly note that the Greek crisis came out of nowhere but quickly developed a savage intensity.  Scary.  And hopefully motivation to avoid the Greek outcome through sensible economic policy at any cost.

(On the other hand, given the strange (to me) way Washington operates, politicians could easily regard the real failing of Greece to be ruling out devaluation as an option by entering the EU.  This would imply that Congress and the sitting administration should set the inflationary ball rolling sooner rather than later.  Not good.  Also not a silver lining, and therefore a topic for another day.