Following on from my last post, a part of the argument that the Eurogroup will try to strike a deal at all costs is that they are seeking to protect the sacrosanct nature of the euro, which involves preserving that it is not possible to exit from it. Once there is an exit, all the euroness is gone and the project is in tatters, and the euroness possessed by those that are left behind is suddenly tainted and now temporary.
Two points on this.
First, nothing is credibly forever. The euro is a set of rules flowing from a series of agreements signed by past member state governments, long since gone. Like all constitutions, given sufficient changes in public opinion of its signatory countries, it can and would change. There is no credible ‘foreverness’ that a Grexit spoils for good.
There are simply probabilities of various currency and fiscal possibilities, defined by the signatories, and the rules governing how different policy instruments covered by them (including interest rates, asset purchases, fiscal redistribution) are set. Grexit might well change those probabilities, but how much is moot. As I argued in my last post, saving Greece now may not change the probabilities of a future Grexit that much, because they could find themselves in the same situation in a year or two. And for different reasons the large country exit probabilities might not alter much [they are too big to save anyway] and the same for the smaller ones [they are easy to save, and their ‘good behaviour’ has instilled the solidarity to save them].
Part of the reason things are not – and never have been – credibly, forever, is that circumstances, including what we know about what is optimal monetary and fiscal policy, change. Setting out to claim that this is the answer [eg the euro, with current membership] once and for all, is hubris. It’s understandable that the euro pilots did this at the outset, of course, because they hoped to make its continuity a self-fulfilling prophecy. But no-one should have believed it, and I presume not everyone did. Instead, as Tom Sargent once pointed out, monetary arrangements can be seen, at best, as a form of slow-motion trial and error, hopefully feeling one’s way towards the arrangement that best fits the times and one’s state of knowledge. Those that argue that Eurogroup will value permanence of membership above all else are arguing that there would never, rightly, come a time when people sit down and think ‘actually, we should never have got into this’ or ‘you now, maybe this isn’t working out any more’.
Moreover, part of this trial and error could be the evolving assessment of the nature of other aspects of the currency arrangements aside from the permanence or otherwise of its members. Suppose permanence is valuable [the above has been about arguing permanence also has costs, but, leave that aside]. But so might be adherence to a set of rules of monetary and fiscal conduct by member states. Since adherence to these rules would govern what was sustainable monetary and fiscal policy for the collective, in the future, and thus, what the benefits of membership were.
Of course these rules in the Eurozone have, through the process of trial and error, been bent and changed, and there is much argument about whether the twists and turns have improved matters or not [see contrasting views of Hans Werner Sinn and, well, most economists outside Germany for a sample of the controversy]. The stability and growth pact was set aside frequently. And we are inventing embryonic fiscal transfers via the banking union, the ESM/EFSF, and the Troika loans and its terms.
But in assessing what should be the enduring nature of the euro for the future, it would not be rational – and I naively assert, therefore, will not be part of the calculus – to weigh non-exit above all else. Permanence of membership might have its advantages. But so might enduring rules of membership.
In short, avoiding Grexit for the sake of preserving expectations that no-one would ever exit is futile, because those expectations won’t be altered that much by this deal: nothing is or should be forever. Second, in so far as it’s good that things are enduring, if not forever, Eurozone policymakers will no doubt value maintaining the expectation that the rules of the game don’t change as well as expectations about who gets to be in the club.