STOCK MARKET WATCH -- Friday, 29 June 2012

[Demeter]

28. To Save the Euro, the Eurozone Governments Must Stand By Greece By Marshall Auerback

http://neweconomicperspectives.org/2012/06/to-save-the-euro-the-eurozone-governments-must-stand-by-greece.html


...In the United States we have 50 states and one central bank. Likewise in other Federal systems such as Canada and Australia. In all cases, there are fund transfers across states. And these are permanent institutional arrangements. It is highly likely that West Virginia or Mississippi will remain long term recipients of Federal transfer payments, even if they remain “uncompetitive” vis a vis, say, Texas or California.

But there cannot be any prospect of a secession of a state that will bring with it its own devalued currency. Hence, there is no incentive for deposit flights from banks in one state or region to another. Therefore, private markets, with a little help from the Fed, will close the financial circuit to the extent there are such fund transfers. The European Monetary System was supposed to work that way. And as long as no one worried about any country leaving the euro, it did. But once the risk of euro exit on Europe’s periphery raised its ugly head, the euro system became completely different. Peter Garber argued that, given such a perceived prospect, the euro system was a perfect mechanism for a deposit run. And once doubts arose in 2009 about a possible euro exit by Greece and Ireland, a deposit run began – and in earnest.

Openly discussing the possibility of a “Grexit” then, simply exacerbates the current problem. It is akin to cutting an artery to demonstrate that one is serious about “discipline” and self-sacrifice”, whilst failing to realise that cutting that artery could well cause the entire patient to bleed to death. And whether it’s Greece which withdraws (or is booted out), or Italy, or Spain, very few people have, as Simon Johnson recently noted:

gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.” Why would that dissolution risk be mitigated if Greece were to exit the Eurozone?

Today, the euro is slowly but surely bleeding a death via the bank deposit runs that are now afflicting much of the periphery and gradually extending further into the core. Commenting on Frank Veneroso’s analysis of the bank run, my colleague Randy Wray argued:

Euroland is now in the midst of a massive run on periphery bank deposits. If you think about it, anyone who still has a Euro deposit in any bank other than a German bank is either a philanthropist or a fool. Moving deposits to German banks is a sure bet: if Germany leaves the EMU depositors will get appreciating Marks, and if Germany remains in the EMU depositors have the safest Euro deposits available.

Why take a risk that Italy or Spain or Greece will leave the EMU, default on Euro-denominated deposits, and redenominate them into a depreciating currency?

Paradoxically, the only way to alleviate this perception is for the European authorities to stand by its weakest member, in order to enhance the perception of the euro’s permanence as a monetary union. That means the line in the sand must be drawn in Greece, not Spain or Italy, as politically unpalatable as that might be to the German public....