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Making sense of what comes next in Greece May 10, 2012

Posted by proeconomia in Main, News on Greece, On the crisis, Opinion.

A Reuters summary by a Greek author, well worth your 5 minutes reading it. Here are the last two paragraphs (emphasis added is mine):

“As Greece approaches its next election, it will be important to track the campaign rhetoric. A coalition government that unites in opposition to austerity will also be saying goodbye to the euro and hello to a new Greek currency. That could cause depositors to flee Greek banks. In the event of a disorderly exit from the EU, the new Greek drachma will likely be worth much less than a euro. Depositors will suspect that such a devaluation would be coming and then have every incentive to exchange a euro on deposit in Greece for a euro on deposit in Germany before the unlimited 1-for-1 conversion rate ends. Otherwise, their money would lose much of its value. That’s the kind of mass exodus Greece cannot afford.

To avoid this scenario, the new government – whenever it’s installed – will have to take concerted steps to make membership in the currency union seem permanent. Right now, it’s hard to see how a new coalition government that would roll back austerity, while also instilling the necessary confidence in the currency union to stave off a summer flight of capital, could be formed. Painful as austerity may seem, at this stage, all of the alternatives appear to be much worse.



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