Good point Ambrose

The Dutch bank ING has had another go at the numbers, calculating that the Greek Drachma would fall by 80pc against the D-Mark in a full-blown disintegration.

The Escudo and the Peseta would fall by 50pc, and the Lira and the Punt by 25pc. Germany would suffer a \”deflationary shock\”.

OK, so that\’s what would happen to the new currencies. The interesting point is:

If the intra-EMU currency misalignment is so extreme that free floats would cut Greece by 80pc, and Spain by 50pc, it surely validates the eurosceptic argument that monetary union has become a preposterous and unworkable arrangement.

Exchange rates are exchange rates, whether the currencies themselves exist or not. So if money is so badly mispriced within the eurozone, 50-80% in places out, what the fuck are all of these places doing in the same currency in the first place?

6 comments on “Good point Ambrose

  1. There’s ‘overshooting’. Also how deliberate it is – as you like to tell us the pound has been deliberately devalued. There was a choice there. The exchange rate is not set by some magic formula but government and other actors’ policies play a large role.

  2. 80% overvaluation of the Greek Euro against the German Euro is simply not credible, it’s wildly overstated. 50% I can believe.

    There was an earlier piece in the Torygraph suggesting a much lower spread – around 30% top to bottom in terms of “fair value” across Eurozone countries. If that’s the case then surely living with the status quo is the path of least resistance (even if the optimal solution is euro exit for 2 or 3 countries this probably can’t be done in a less damaging manner than putting up with a bit of exchange rate mismatch). Besides, even floating currencies can spend large amounts of time out of whack with their “fair value” (go to Switzerland if you don’t believe me).

    If however Greece really does need an 80% devaluation I think they should be pushed before they jump.

  3. It seems unlikely – wouldn’t it mean Greece’s GDP is on a par with some sub-Saharan African countries? That seems too low.

  4. Some of these studies (UBS) are evn more apocalyptic. Citi has done one with quite precise probabilities. ftalphaville is making quite a collection.
    Since each outcome, disorderly breakup, orderly breakup, muddle through, reform and stability would be a one off event I’m baffled as to how probabilities are assigned and how useful they are.

  5. “Exchange rates are exchange rates, whether the currencies themselves exist or not.”

    What does this mean, by the way? I don’t think it means anything.

  6. JamesV, if the numbers are to be believed, a neo-Drachma wouldn’t be overvalued by 80% but by 400%.

    If the bubble pops for the Bubbles, they only have themselves to blame. Economics trumps politics. This could end up very grisly indeed, but politicians periodically need a reminder of how far their remit runs.

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