Letting Greece Go

John Cochrane makes a good point about Greece: if you don’t let it default within the Euro framework, the Euro is doomed.

Europe’s deepest problem is bad ideas. Unpleasant price movements represent “illiquidity,” “speculators,” “market manipulation,” “lack of confidence” and “contagion,” not the hard reality of looming default. The point of policy is to “calm markets” and “provide confidence”—not to solve financial problems.

The worst idea of all is that Europe’s admirable economic free trade zone and currency union cannot survive a sovereign default. It is precisely allowing sovereign default, and isolating the central bank from sovereign default, that is the only way to keep the union together. That is, after all, how the euro was set up in the first place. It’s almost too late. But not quite.

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About Eric Falkenstein 136 Articles

Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc.

Eric received his Ph.D. in Economics from Northwestern University , 1994 and his B.A. in Economics from Washington University in St. Louis, 1987

He is the author of the 2009 book Finding Alpha.

Visit: Eric Falkenstein's Website

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