Thursday, February 05, 2015


Is Grexit (Greek Exit) the most wonderful sounding word since blog (web log)? Regardless, you'd expect to see more written about this from MMT circles but it seems not.

Krugman has some talking points about the possibility of Greece exiting the Euro, (which seems to be scheduled for Feb 28th?):
3. If the creditors do play hardball, their leverage does not come from the ability to refuse new loans to the Greek government. With Greece running a primary surplus, all new loans — and then some — are going to pay principal and interest on old loans, with less than nothing going to the Greeks. There was modest de facto aid to Greece in 2010-2012, but no aid is currently flowing, nor will it.
By "primary surplus" Krugman means that the Greek government will take in more via taxes than it spends, so Greece will shrink it's overall debt level. Running a surplus in this way is naturally contractionary, both in the direct sense (there will be less spending, which directly contributes to GDP) but also in the indirect sense that the non-Govt sector will have less money, and as a consequence, try to save more to get to their desired savings target as their budgetary constraint tightens.

The ECB can essentially cut Greece off from the euro banking system, but they cannot cut Greece off from it's drachma system, and as economists keep telling us, "money doesn't matter". Real assets are the same whether denominated in drachma or euros. This is a chance to show how true that is by simply exiting the euro, converting to drachma, and spending while at the same time dramatically improving the ability to tax (not to "raise revenue" but to create downstream demand for the drachma and manage inflation).


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