"....it is instructive to compare what is going on with Greece today with how a truly unified nation, such as the United States, deals with crisis in one of its constituent units, say California.
California shares a common currency with the rest of the U.S., just as Greece (or Ireland or Spain) does with the Eurozone. But when the state government in California goes bust:
- Californians automatically get welfare checks and other transfer payments from Washington.
- Californian borrowers do not get shut out of credit markets and those with healthy balance sheets can borrow from the rest of the nation. This is because there is no “California risk” the way there is Greek sovereign risk; borrowers in California operate under a federal legal regime and the state of California cannot force them to hold California paper or prevent them from repaying their debts to non-Californians.
- The Federal Reserve stands ready to act as a lender of last resort to any Californian bank. (Why? Well, because it is one country after all…)
- California has representatives and senators in Washington, D.C., who can push for remedies for California’s economic troubles through political channels (e.g., fiscal spending, federal assistance, debt relief)
- Californians can easily move and seek jobs elsewhere in the U.S."
The flip side of these benefits is that there is no expectation that Washington, DC must bail the state government.
A subtle point here is that Washington’s “no bail out” commitment is rendered credible by the direct support residents of California get from Washington, DC. This support limits the economic/political fallout in California.
By contrast, the bankruptcy of the Greek government condemns the entire Greek financial system and sends the entire Greek economy down the drain.
.. because the state of California has no “sovereign powers,” it is effectively just like any other moderately large borrower.
The consequences of its bankruptcy are no more or less serious.
"The political quid pro quo in the U.S. is this. California has given up its sovereignty and has accepted the reach of federal laws and regulations. In return, Californians are part of the governance structure in Washington. Neither of these is true to quite the same extent in the Eurozone. "
Consequently,
a crisis within the Eurozone is more costly both in economic and political terms.
We get
ad hoc arrangements to extend credit (rather than automaticity),
protracted financial crises and deeper economic recession,
and mutual resentment on both sides.
Ultimately, the survival of the Eurozone itself is threatened.
the euro’s institutional incompleteness has left the Eurozone badly exposed to the crisis.
The main lesson from the debacle is that economic union requires political union.
The EU needs either more political union
if it wants to keep its single market,
or
less economic union
if it is unable to achieve political integration.
At this stage, the former path looks by far the less likely.
If it has to come to it,
the more orderly and premeditated the coming break-up of the Eurozone,
the better it will be."
the presentation here strikes me as far from air tight
far far far
minor side bar:
i'd prefer to compare greece to new york city in the Ford hunk of the mid 70's
first question
did nueva york have a huge import gap with the rest of "the union" ???
to be continued
when ADHD level has receeded
but first a pk add ons :
" we have huge interregional labor mobility. (Blanchard and Katz (pdf) is the classic reference).
This helps in the boom as well as the slump: when there’s an inrush of money into a state, that draws in workers, but does not do too much to drive up wages relative to the rest of the country. That way, when the music stops, costs aren’t as much out of line as they are in, say, Spain right now."
" fiscal integration: booming states pay a lot in taxes, slumping states get a lot of automatic transfers."
".. an integrated banking system and common deposit insurance / FannieFreddie and all that mean that the vicious circle running through sovereign debt and banks is a lot less severe"
" a common currency has a much better chance of working if you actually have a nation"
