My short article in today's Scotsman on why the initial euphoria in the financial markets after the Greek election results was short-lived is here.
The fundamental problem is that Germany and the ECB are insisting on the wrong policies. Imposing harsh austerity on the Greeks will not deliver what the eurozone authorities want. There is little likelihood that present policies will resolve the Greek fiscal crisis and keep Greece in the euro. The same analysis also applies to Spain and Italy.
Financial market turbulence will continue unless and until there is significant forgiveness of Greek debt by the eurozone authorities. Significant steps towards the creation of a fiscal union are the only effective solutions to the financial problems besetting the eurozone. This would involve: greater fiscal transfers from Germany to the periphery, mutualisation of existing sovereign debt and reductions in the fiscal autonomy of member states.
And even then, if Greece manages to stay within the euro, a way has to be found to restore Greek, and other peripheral country, competitiveness relative to other eurozone states and Germany especially.
In the short to medium term, the only feasible way this can happen is for core eurozone and German wages and prices to rise relatively. Currently, this seems politically infeasible. Hence, a Greek exit from the euro and devaluation of the new Drachma remains likely. And the markets recognize this.
Tomorrow we, the Fraser of Allander Institute, publish our Economic Commentary. In addition, to our medium term forecast of output and jobs, we consider the implications of a Greek exit and eurozone break-up for the Scottish economy.
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