Thoughts on what I could not say in today’s Oxford Analytica piece — this time down to lack of space and a desire to preserve a detached tone. The piece is “Euro-area report card”, on how the externally-weaker eurozone members are faring in alleviating their overvaluations. As in the blog posts of recent weeks, the overriding question is: Are these economies more like Argentina or Hong Kong?
- I just don’t see how Greece is going to make it under the status quo EMU configuration. Inflation is accelerating. The economy is just not a great candidate for deflation, at least insofar as the “Economic Freedom Index” rankings imply. Since these rankings seem a reasonable proxy for barriers to wage deflation, I think they’re useful. As I’ve said a million times, it is no accident that HK was ranked No 1 (most flexible, or most “free”) in the midst of its overvaluation episode (1998) while Argentina was ranked 32. Greece in 2010 is ranked 73.
- In light of which, we must consider the only other means of squaring the circle. This is to revisit the terms of Greece’s engagement globally and with EMU. It will need an import surchange and export bounty. I would not even be surprised to see an official seal of approval for such steps from Brussels, in the name of preserving the nominal integrity of EMU. Expect any such moves to be couched in all sorts of obfuscating language.
- Is all this worth it? Of course not. Leaving EMU is not an existential threat to Europe. Those claiming otherwise are following the same dogged, dogmatic, line of reasoning preceding every other currency collapse ever witnessed.
- That leaves the IPSI’s. The overvaluations are not severe in Portugal and Italy; and inflation in both is very subdued; and the euro’s weakness is helpful. Spain is more overvalued; no longer deflating. Ireland though deflating smartly is still 20% overvalued. What is preventing me from declaring an “all clear” signal is the impact of Greece. When it devalues (nominally or administratively), its friends suffer another jolt of overvaluation. We’ve been here before.
- What I have in mind for Greece, normatively, is something more on the template of Brazil 1999. Man did they do a good job exiting the crawling peg! And credit where it’s due: The Fund was a key player in this episode. I mean, here is one case where the currency was eased out of a fixed arrangement with an entirely orderly devaluation. It can be done for Greece as well. We just need a pause in the dogma.