The Financial Times’s Alphaville blog recently had a good write-up of what’s happening, and – implicitly – how the Greek euro exit may be approaching.
What’s happening now is a “bank jog” — Greeks are pulling euro deposits out of banks fairly rapidly, but not quite fast enough to be called a bank run. But where are the euros coming from?
Basically, banks are borrowing them from Greece’s central bank, which in turn must borrow them from the European Central Bank.
The question then becomes how far the E.C.B. is willing to go here; is it willing, in effect, to lend enough money to buy up the entire balance sheet of the Greek banking sector, given the likelihood that this sector will be left insolvent by Greek default?
Yet if the E.C.B. says no more, Greek banks stop operating — and it’s hard to see how they can be restored to operation except by ditching the euro and using something else.
And if that happens, surely depositors in other European countries will start their own bank jogs …
Kevin O’Rourke, an economist at Oxford, takes on Lorenzo Bini Smaghi, a former member of the E.C.B.’s executive board, who argued in a commentary article published in the Financial Times on May 16 that Greek voters are being “irrational” in rejecting austerity.
As Mr. O’Rourke wrote in “The Irish Economy” blog, that’s an odd position to take given that the policy in question has been an abject failure.
“Leaders in other European countries should surely be trying to offer Greek voters something that the status quo excludes: hope,” Mr. O’Rourke explained. “Instead, they are offering warnings about dire consequences, and statements to the effect that the rest of us can handle a Greek exit. You do have to ask: who is it that is being irrational here?”
I’d just add that as someone who follows this stuff fairly closely, Mr. Bini Smaghi of all people should be the last to lecture the Greeks on sense and sensibility. Few people have been as consistently wrong in their insistence that the initial Greek plan was feasible, that no debt restructuring was necessary or desirable, and that all skeptics about the various plans were just misinformed.
In a way, Mr. Bini Smaghi exemplifies the European elite in this crisis: moralizing, sententious, always wrong yet always convinced that supporters of the other side of the argument are ignorant and unwashed.
It’s an amazing thing to watch.
© 2012 The New York Times Company
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).
Copyright 2012 The New York Times.