Wednesday, February 17, 2010

EU: We Are Going to Crush Greece (Feldstein Saw It Coming)

Ambrose Evans-Pritchard reports:
The European Union has shown its righteous wrath by stripping Greece of its vote at a crucial meeting next month, the worst humiliation ever suffered by an EU member state.

The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty.
This could get interesting. If Greece fails to implement the imposed EU austerity measures, then what? Will Greece be allowed to secede from the EU? Will the EU attempt to somehow enforce its austerity measures?

My favorite mainstream economist, came pretty close to seeing these kinds of problems developing. In an article, "EMU and International Conflict," published in the November 1997 issue of Foreign Affairs, Feldstein recognized the many destabilising factors surrounding the EU construct. Here's part of a summary by Joel Meeker of Feldstein's paper (The paper itself is not online):
Feldstein believes that the transition to the Euro may well bring about two unexpected results: an increasingly contentious and perhaps only short-lived union among European participants, and conflict between Europe and other countries, including the United States. He presents the following scenario: Existing disagreements on goals and methods of monetary policy among European Monetary Union (EMU) participants would be aggravated when normal business cycles raise unemployment in any given country...This would cause a rise in inter-European distrust, which would be compounded by unrealized expectations about power sharing, as well as both domestic and international policies...

As to the smaller EMU countries, Feldstein maintains they will become frustrated by the increasing dominance of the heavyweights in deciding not only foreign but also domestic policy for the European Union.


  1. A house divided against itself cannot stand. I believe this government cannot endure permanently half-massively leveraged debt-ridden and half-somewhat massively leveraged debt-ridden.. I do not expect the Union to be dissolved - I do not expect the house to fall - but I do expect it will cease to be divided. It will become all one thing or all the other.

  2. According to the Telegraph:

    ""There is a huge perception gap between what Greeks think is the problem and the reality," said one hedge fund manager with Greek ties. "Germany is looking for some blood-letting before coming to the rescue, and I don’t think the people or even the Greek government yet understands that."