The bottom line is this. Greece has no choice but to adopt much needed further fiscal reforms and suffer a long period of harse austerity if it is both to remain in the EMU and Germany continues to block the Eurobond. Regardless of whether Greece stays in the EMU, they must continue with fiscal reforms. They have no choice in that regard.
The best situation for Greece would be for Germany, and in my opinion best for Germany too in the long run, to agree to the Eurobond. That would allow Greece to borrow at reasonable rates and permit it to lift itself slowly out of recession while continuing fiscal reform. They would still suffer some austerity measures, but those measures would be far more tolerable.
Applying a Keynesian approach to the Greece economy is out of the question so long as Greece must borrow at 10% plus, on top of already heavy debt. Keynesian economics can not work if a countries debt is too high in the first place and thus no one will lend to them at affordable rates. Even if Greece had its own central bank and could thus implement quantitative easing on its own, it would not work well in their case. Their economy is too small and their fiscal imbalances still too great, and their debt to large relative to the size of their economy. And they would enjoy none of the benefits of a reserve currency nation. They would suffer mightily from a lack of foreign currency reserves. In a word, their economy would lack the requisite "Robustness" to pull off QE.
Basically, they are screwed so long as there is no Eurobond. Things will only get worse for them. They can not recover, other than through harsh austerity, having to borrow at rates 7% or more higher than their partner nations. They will end up piling debt upon debt. They are stuck with quite severe austerity because they simply can not afford to borrow at those high rates. If they do, they will eventually be owned lock stock and barrel by the Germans, who will continue to pull the strings of their little marionette.
The best situation for Greece would be for Germany, and in my opinion best for Germany too in the long run, to agree to the Eurobond. That would allow Greece to borrow at reasonable rates and permit it to lift itself slowly out of recession while continuing fiscal reform. They would still suffer some austerity measures, but those measures would be far more tolerable.
Applying a Keynesian approach to the Greece economy is out of the question so long as Greece must borrow at 10% plus, on top of already heavy debt. Keynesian economics can not work if a countries debt is too high in the first place and thus no one will lend to them at affordable rates. Even if Greece had its own central bank and could thus implement quantitative easing on its own, it would not work well in their case. Their economy is too small and their fiscal imbalances still too great, and their debt to large relative to the size of their economy. And they would enjoy none of the benefits of a reserve currency nation. They would suffer mightily from a lack of foreign currency reserves. In a word, their economy would lack the requisite "Robustness" to pull off QE.
Basically, they are screwed so long as there is no Eurobond. Things will only get worse for them. They can not recover, other than through harsh austerity, having to borrow at rates 7% or more higher than their partner nations. They will end up piling debt upon debt. They are stuck with quite severe austerity because they simply can not afford to borrow at those high rates. If they do, they will eventually be owned lock stock and barrel by the Germans, who will continue to pull the strings of their little marionette.
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