The EU: Towards and ever closer Union

Over the weekend, a friend of mine argued that the founders of the Eurozone knew that a monetary union without a fiscal union would come undone. So they sowed the seeds of a fiscal crises into the EZ, gambling that the unavoidable pain would be enough to force fiscal union but not so much that the monetary union itself would crumble. At the heart of all of this would be to bind Germany and France together irrevocably.

The ECB continues to try and thread this needs with its latest bail out -- more money, more time, but more pain. If the pain ceased, the push for fiscal union would also cease.

Kicking the can down the road is normally considered idle procrastination. This is different. This is deliberate procrastination. If Greece falls today, nobody knows what kind of economic domino effect it will have on other debtors like Portugal, Italy, and Spain, or the rest of the Europe. Europe has selected the muddle-through and draw-random-recovery-lines option. The honest and inevitable choice -- a wild default or even Greece's departure from the EU -- is impossible for euro ministers to imagine suffering through, for today. Meanwhile, Greece suffers.

Not deliberate procrastination. An engineered application of political pressure. We'll see if it's been calibrated correctly.

Confusion on Greece

Megan McArdle's column highlights all the confusion going on in Greece right now. One commenter gets it right:

Jay wants to know why the Greeks should bother to leave the euro if they're going to default anyway:

My own belief is that Greece should exit the euro, and redenominate its debt in drachmae, which would constitute a de-facto default
In what way does changing currencies help? I mean, you're already defaulting.

Is the idea that you'll be able to inflate away future debts more easily? Who would buy Greek debt knowing that the only reason they are issued in Drachma instead of Euro is specifically because the Greeks intend to inflate it away?

Isn't this just the difference between nominal and real interest rates?

This is exactly correct. If Greece re-denominated the debt in drachmae it would constitute a default. It would also constitute a re-assertion of monetary sovereignty, and Greece would never have to worry about defaulting again, it would just need to worry about balancing unemployment against inflation. The better it gets at tax collection, the more it can better it can do at lowering unemployment without triggering inflation.