text: 1) The great Milton Friedman on the Euro, from back in 1997. The analysis is extremely pertinent right now.
  2) My 1999 paper with Alesina, on Europe. Sections 2.2 and 2.3 made some observations that have also proven pertinent ("I told you so" - 18 year ago).
  3) The UCLA Anderson blog asks me what I think about the referendum, the Greek crisis and its effect on the US. Here is the post, replicated here:
  UCLA Anderson Professor Romain Wacziarg, like most economists, agrees that the Greek economic crisis will not have devastating effects on the rest of the world’s economy, irrespective of the outcome of Sunday’s referendum in Greece. Some in the U.S. worry that the likely further depreciation of the Euro will negatively affect U.S. exports. Wacziarg foresees a probable further depreciation of the euro, although he says that part of that may already be priced into the current exchange rate. “If Greece exits the Euro, the currency stands to depreciate, meaning European goods will become more affordable for foreigners and U.S. exports will become more expensive in Europe. This would help Airbus and hurt Boeing, for example. You may also see some turbulence in the stock markets, but these will be mostly due to psychological factors and prove to be short-lived, as the U.S. economy is not fundamentally very exposed to Greece.”
  So none of this will amount a crash in the U.S. economy, which continues its slow but steady recovery from the global financial crisis. “Direct ripple effects would occur if U.S. banks owned a lot of Greek debt — but they don’t,” said Wacziarg. The effects will at worse be indirect. And, he said, the rise in interest rates the U.S. can expect soon from the Federal Reserve is likely to raise the value of the dollar more than a further decline in the value of the euro.
  Wacziarg said, “The problem is not so much the principle of the referendum, it’s the timing.” Greece has an enormous public sector that will have to shrink considerably before the country can expect creditors to reopen their pocketbooks. Wacziarg is not alone in observing that the conditions for such new loans were known to Greece more or less in their current form weeks or even months ago. “The time to organize a referendum would have been then,” he said, “not now in the heat of the crisis. Greece had to default on a loan to the IMF, an unprecedented event for a developed country. It had to shut banks and impose restrictions on cash withdrawals and money transfers. It is the worst possible time to organize a referendum, and the crisis is likely to continue whatever the outcome of the vote.”
  While none of the news is good for Greece or its place in the European Union, Wacziarg points out it’s something of a victory for economist Robert Mundell’s Nobel Prize-winning Theory of Optimum Currency Areas. That theory stated that in order for a common currency to make sense, countries need to have sufficiently similar economic structures and macroeconomic cycles. “It was always doubtful that Greece was sufficiently in sync with the core of European economies to qualify as a member of the euro zone,” said Wacziarg. “It would have been better for the euro to remain initially confined to a smaller group of more similar economies than to extend to heterogeneous countries at the periphery — such as Greece and Portugal. At the time of the creation of the euro in 1999, politics trumped economics, and Greece was admitted to the club. Now, economics is having its revenge.”
  Still wondering what the implications of the Greek economic crisis are for the U.S. and the world? Wacziarg recommends the FAQ-style primer prepared by Anil Kashyap at the University of Chicago.
  4) I made the following comments as a follow-up, after the referendum results became known:
  I think a substantial portion of Eurozone governments have resolved that they have had enough with Greek government’s shenanigans. Their public opinions / electorates also. Since decisions are made by consensus in the EU, and the leader of the pack (Germany) is one of those who are fed up, at this point I expect that there will be no deal, and that Greece will have to exit the Euro. Even if Germany softens, there are enough others to make acceptance of a deal difficult (the Netherlands, some Eastern European countries like Slovakia who have played by the rules and made huge sacrifices to join the Eurozone, etc.). These countries can block a deal and seem inclined to do so. Germany insists on conditions even tougher than those whose refusal by the Greek government led to the referendum.
  The process will involve first introducing a parallel currency (scrip) that are IOUs representing the Greek government’s liabilities to recipients of government spending. These IOUs will be traded internally in Greece. There will be haircuts on deposits remaining in Greece (a depositor in a bank that goes to bed one evening with a balance on their account of 1000 euros wakes up with a balance of 500 euros – yes, it is possible!). Ultimately the only way to recapitalize the banks and get the financial sector working again will be to introduce a currency that the Greeks control themselves. That will be an arduous and lengthy process.
  Before that happens, Greece will suffer an even deeper recession and the big unknown is whether that will lead to social and political unrest. Tough times ahead.
  In sum I see little chance of a deal restoring financing to Greece at the summit Sunday. If that is the case the scenario above will start to play out.
  Posted by Romain Wacziarg on 07/08/2015 at 05:15 PM in Financial Crisis, General, International Finance, Political Economy | Permalink