So, Germany and the IMF are now openly talking about letting Greece default and kicking it out of the euro (even though there is no mechanism in place for removing a country from the euro and no one really knows what a default will do to the region).
And, with Spain’s 10-year bond rates climbing to nearly 7.5% this morning, clearly investors don’t believe that the latest bailout plan for Spain is going to work. Just as clearly, Mariano Rajoy has no clue what is going on or how to deal with the crisis. Spain’s whole approach seems to be: delay, deny, do nothing, and wait for things to get so bad that the Germans force you to do whatever; then, you can tell your citizens that it is not your fault all these bad things are happening, the Germans are making you do them. Good times.
As it happens, I’ve been having fun reading some old economics stuff lately — kind of like the angst a teenager gets from reading Romantic poetry, but for middled-aged people — and the big thing I have noticed is how familiar all this feels. Yet again, the political, the clueless, and the spiteful is trumping the economically sound. As JM Keynes said soon after the peace of WWI:
[...] the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the Four. Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of politics, of electoral chicane, from every point of view except that of the economic future of the States whose destiny they were handling.
- Keynes, The Economic Consequences of the Peace
UPDATE: Of course, Paul Krugman weighs in on Germany’s threat to let Greece leave the euro and makes some good points:
Once a country, any country, has demonstrated that the euro isn’t necessarily forever, investors — and ordinary bank depositors — in other countries are bound to take note. I’d be shocked if Greek exit isn’t followed by large bank withdrawals all around the European periphery.
And, just to hammer the point home:
My advice here is to be afraid, be very afraid.