Yes, Portugal should default

So should Greece and Ireland:

Upon closer inspection, however, none of these benefits materialise. In Greece and Ireland, bailouts did not stabilise markets, did not encourage economic growth, and did not inspire a change of heart about credit. If anything, these cases suggest that, within the straitjacket of a monetary union, the bailout mix does not work.

Quite. Within a monetary union, with the exchange rate fixed, there\’s no real way to grow the economy sufficiently to get out of the debt trap.

In theory we could have a decade or two of grinding internal devaluation, sure. But that theory isn\’t going to last all that long against the Demos undergoing the devaluation.

I really do think that the federasts have this all wrong.

Yes, I know that they think that a sovereign default will damage, possibly even kill, their darling, the euro. And of course I\’m in favour of that myself, thinking as I do that the euro was a damn fool idea in the first place.

But I go on to think that not allowing a default is going to kill the EU itself. And again, I\’m all in favour of that, thinking as I do that the EU is a damn fool idea. But this is advice to the federasts, not the playing out of my own desires.

Can\’t you see that the people of, at minimum, Ireland, Greece and Portugal (with the possible addition of Spain and even Italy) just will not put up with decades of stagnation? They will leave if this is imposed upon them.

The get out clause, that of full economic union, just ain\’t gonna happen either. This requires huge shifts of fiscal resources from the rich to the poor countries. At least of the order of the SE of England\’s subsidies to the North, Scotland, or of West Germany\’s to East. No, not some rounding error of a percentage point of GDP or so, but 5%, 10% of GDP.

Given that the Swedish government take of the Swedish economy is already north of 50%, is there actually 10% of Swedish GDP available to send south?

It\’s just not going to work. Better to allow the defaults now and from that federast viewpoint, rebuild your desired system in the decades to come, not to blow it all right now.

7 thoughts on “Yes, Portugal should default”

  1. “The get out clause, that of full economic union, just ain’t gonna happen either. This requires huge shifts of fiscal resources from the rich to the poor countries.”

    Requires – as in State directed? I know it is the political orthodoxy that you redistribute money from productive areas to unproductive ones but is it necessary?

    You could surely have economic union with a market minded EC that encouraged poorer regions to compete on price rather than stick their hand out.

    Being the wealthier parts isn’t always an advantage – as we can see with people migrating north in Europe to work for more than they could at home but still undercutting native labour prices, and in some instances to exploit the more comfortable welfare systems.

    Europe has shied away from letting downwards pressures exert themselves – they could be reducing benefits in the northern countries, lowering the cost of employment so wages can fall and reducing taxation to reduce the cost of living. They chose to import cheaper labour rather than set about making native labour cheaper. They aren’t interested in building up the poorer nations at the expense of the wealthier ones – they are interested in maintaining the status quo and in buying votes.

  2. A genuine question about return to GDP growth in countries that can print money (because I don’t know a lot about how it is measured) – how much of it is down to the reduced value of the unit in which GDP is measured? And if the answer is “lots, and thus real growth in Printland isn’t much more than in Fixedland, but it just feels different”, how much of the stagnation-causing-political-turmoil effect is merely psychology among the economically illiterate?

  3. PS, I agree Portugal and anyone else who can’t pay their bills should default, and that’s despite being a federast. I think some high-ups in supposedly solvent countries like Germany or the Netherlands are worried that the “no bailout clause” might actually be shown to work, and in so doing increase the risk premium on their own overwhelming debts.

  4. Well, the Swedish govt consumes about 26% of GDP, not over 50% so there might be room. But also transfers in a monetary union in OCA theory are to parts that are suffering from a cyclical downturn, not from rich to poor (Ireland remains one of the richer parts).

    A similar thought would be that that a permanent devaluation doesn’t make a country richer.

  5. There is another scenario: Hans gets fed up of subsidising PIIGS, especially when he sees them retiring earlier and on relatively better pensions than him, and puts pressure on their own politicians to dump the teuro and renitstate the Mark.

    Unlikely I know, but I bet that scares the rest of Europe more than defaults.

  6. Yes, basically it’s “reducing costs” – which Ireland has done quite successfully.

    I’m not sure I buy this idea the Germans are itching to get out – Germany surely does very well from half its trade partners being unable to devalue?

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