Monday, May 10, 2010

A Conversation

Coworker: What do you think of the European rescue package?

FLG: It's pretty big. I wonder if it's enough.

Coworker: Isn't it something like a trillion dollars?

FLG: I heard it's 60 billion euros in cash and then 440 billion in loan guarantees. That's not quite a trillion dollars, but still a lot of money.

Coworker: How much do you think is needed?

FLG: I'm not sure.

Coworker: Didn't they talk about this in international econ classes?

FLG: That's where you are going wrong. This isn't really an economic issue. It's mostly political. The euro is more of a political statement and tool than an economic one.

Coworker: What are you talking about? It's a currency. That's economic.

FLG: It's an economic unit to forward political integration. They let Greece into the club even though everybody knew it was a lie because they were making a political decision, not an economic one.

Coworker: But the euro has been successful. It is worth more than the dollar.

FLG: Look, the euro isn't economically nonsensical. There are economic arguments for it. But those were and are largely subsequent rationalizations for the desire to integrate politically. Also, this Greek issue is largely a political question. Does the Greek government and do the Greek people have the will to pay off their debts?

Coworker: But if they default it will mean bad things for the euro. This still has an economic angle.

FLG: If Greece defaults, the euro could unravel. And in the short run, there'd be problems. But trust me, the motivation to protect the euro is largely a political desire among European elites to keep political integration going. If this fails, then the entire European project fails.

Coworker: Seriously?

FLG: Managing the economics was supposed to be the relatively easy part of the integration. Sure, it's complicated and all, but...well..let me put it this way. If these guys can't manage economics during ten years of relative peace and then can't manage the monetary crisis, then would you trust them with the management of a national security emergency that required coordination? I mean, like Russia invades or some state falls apart or something?

Coworker: Oh come on, what's the likelihood that would happen?

FLG: Right. Let's say I asked you the following last year: What's the likelihood that a eurozone country, say Greece, will default on its debt? And if that happens how fast would Germany and France rush to its aid without question? And it's totally unthinkable that a country would pull out?

Coworker: I see your point.

FLG: Yeah, I wouldn't feel so sanguine about them managing national security either. And if so, then what's the ultimate point of the EU?

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