I find all the reporting of the Greek (and following Spanish, Italian, etc.) debt crisis unbelievably frustrating.
Why does everyone equate Greece defaulting on its debt with Greece leaving or being kicked out of the euro? The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so.
It is precisely the doublespeak confusion of sovereign default with breaking up a currency union which is causing a lot of the run.
It's pretty clear that if Greece leaves the Euro and reintroduces the Drachma, that event will come with capital controls, swift devaluation, effective expropriation of savings, and a disastrous and chaotic rewriting of all private contracts (do I have to pay this bill in Euros or Drachmas? Every contract ends up in court. Greek court.)
Quiz: If your politicians are even talking about this sort of thing (together with "austerity" which is heavy on higher capital taxation) what do you do? Answer: take your money out of the banks, now. Take everything that is not bolted down and leave.
Just talking about leaving the Euro is How To Start a Bank Run 101.
The right step is the opposite: firmly announce and commit as much as possible that Greece (and Italy, Spain, etc.) will not leave the euro.
Precommitment is hard, but a good first step is to make it clear you know the action you're trying to commit not to do will hurt you. Communicating a commitment not to have dessert is hard. Communicating a commitment not to shoot yourself in the foot should be easier. Start by not saying that shooting yourself in the foot will taste good.
Politicians need to repeat over and over again that they understand a default does not mean euro exit -- that the two steps are completely separate decisions; that a currency union with sovereign default is perfectly possible.
Them they need to articulate just what a disaster leaving the Euro will be. They need to say they will tolerate sovereign default, bank failures, and drastic cuts in government payments rather than breakup.
Yes, cuts. The question for Greece is not whether it will cut payments. Stimulus is off the table, unless the Germans feel like paying for it, which they don't. The question for Greece is whether, having promised 10 euros, it will pay 10 devalued drachmas or 5 actual euros. The supposed benefit of euro exit and swift devaluation is the belief that people will be fooled that the 10 Drachmas are not a "cut" like the 5 euros would be. Good luck with that.
Think what would happen if, in order for Illinois or California to solve their debt, pension and benefits debacles, they decided to leave the dollar zone, institute capital controls, redenominate all bank accounts and private contracts in their borders, and devalue. Plus big wealth taxes. Now they can tell their pensioners, "see, we didn't cut your benefits after all." Would the pensioners be fooled? Would this set of steps make them more competitive? And if Illinois or California politicians started talking about this sort of thing, how fast would the bank run start?
A Greek departure would also be disastrous for the rest of Euroland. Yes, Greece is small. But people with bank accounts in Spain or Italy would see clearly that their leaders do not understand sovereign default can coexist with a currency union. The run starts. Sorry, intensifies. Greece is a huge precedent.
