Calls for a Greek pullout ludicrous

17:04, June 08, 2010      

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The Greek sovereign-debt crisis and the attempts of the European Union to quell the simmering pot before it boils over is commanding international attention.

The sovereign-debt problem isn't in any sense the end of the eurozone. The foreign-exchange rate of the euro may fluctuate against other leading currencies, as is to be expected in a floating-rate regime, but Greece isn't going to withdraw from the eurozone, nor is it likely to be expelled.

Whatever the legal position, the view that Greece, or any other country in the throes of recession, should withdraw in order to benefit from devaluation of their currencies, is simply ludicrous. It is difficult to introduce a new currency at the best of times. But when the first item on the agenda of a new currency is likely to be a substantial devaluation, the mere suggestion might be sufficient to spark a civil war between creditors and debtors.

Given that all public as well as private-sector debts are denominated in euros, or other hard currencies, the introduction of a new drachma would provide little respite. It would probably cause the domestic banking system to collapse as its assets were devalued relative to its liabilities, and the government to default as the international community would hardly perceive such a move as being in its interests.

The trend is actually going in the opposite direction as small countries, whose currencies lack credibility and stability in unregulated foreign-exchange markets, long for the safety of a major currency with deep reserves.

A bailout provides a classic case of moral hazard, both for other governments as well as for banks, which knowingly buy high-yielding, but risky assets.

Second, even after all the political grumbling and foot-dragging, the eurozone governments had little option but to bail out Greece. Such is the involvement of German, French, Austrian and other banks in the Greek sovereign-debt market that the alternative would have been a rescue operation of domestic eurozone banks. The motive was self-interest, not altruism.

Hannes Androsch was Austria's finance minister between 1970 and 1981. He is the founder of AIC Androsch International Management Consulting in Vienna. The opinions expressed are his own.

Source:China Daily

(Editor:黄蓓蓓)

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