Thursday, February 12, 2015

Alan Greenspan, former head of the US Federal Reserve, on the Greek crisis

The former head of the U.S. Federal Reserve, conservative economist Alan Greenspan argues, that the only way for Greece to get out of the present bailout terms is a Grexit — to exit the euro zone.
Greenspan, was Chair of the US Federal Reserve from 1987 to 2006. He was a champion of free market capitalism and was part of the the inner circle of Ayn Rand and a supporter of the philosophy of Objectivism. After he became head of the Federal Reserve some objectivists criticized him for abandoning free market principles.Democrats often criticized him as having politicized his position as head of the Reserve. Greenspan argued strenuously for the privatization of social security. Although a Republican, Greenspan strongly supported President Bill Clinton in 1993 when Clinton introduced a deficit reduction plan that included tax increases and budget cuts. Greenspan's policies that shunned regulations are regarded by some as partly responsible for the recent recession. In a Congressional hearing n October of 2008, Greenspan admitted that his free-market ideology that led him not to adopt some types of regulation had been mistaken.
Greenspan has long been critical of the euro zone single currency. He believes that only a political union creates the conditions that can support a single currency. You need something like a United States of Europe. At this time, Greenspan claims the 19 sovereign countries of the euro zone are unwilling to create such an entity and hence the euro zone is doomed.
Greenspan believes that the EU will not be willing to put up even more loans that are necessary to bolster the Greek economy. German Finance Minister Wolfgang Schaeuble claims that the Greek bailout conditions were very generous and he saw no justification for relaxing them further. While Greek finance minister Yanis Vourafakis believes that he can negotiate a new deal that will allow Greek to escape from its debt trap, grow the economy, and spend on social programs, Greenspan thinks that the only way that Greece can resolve its situation is through a Grexit, or exiting the euro zone altogether. Greenspan says: "I believe [Greece] will eventually leave. I don't think it helps them or the rest of the eurozone - it is just a matter of time before everyone recognises that parting is the best strategy...The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated - actually even just fiscally integrated won't do it."As for Varoufakis and Tsipras being able to negotiate a new deal, Greenspan claims that it is the euro zone officials who hold all the cards.
While Greece will be forced to leave the euro zone according to Greenspan, this will leave the euro intact. He agrees that the zone is readier now than earlier to survive the Grexit. However, the attempt to hold the euro zone together is putting strains on other countries as well such as Italy, Portugal, Spain, and even France. Greenspan thinks that in time other southern European countries may also choose to exit the zone.
Greenspan has been wrong in the past, particularly with respect to the ability of markets to act rationally without regulation and avoid a crash. In 2008 the financial crisis, many believe, prove Greenspan wrong and he himself appears to admit this. Nevertheless, Greenspan's analysis of the situation in Europe is well worth considering and may prove correct.

Yanis Vourafakis, the Greek finance minister, continues to insist that there is no plan for a Grexit and that any such move would bring down the entire euro zone "house of cards" :“Exit from the euro does not even enter into our plans, quite simply because the euro is fragile. It is like a house of cards. If you pull away the Greek card, they all come down. Do we really want Europe to break apart? Anybody who is tempted to think it possible to amputate Greece strategically from Europe should be careful. It is very dangerous. Who would be hit after us? Portugal? What would happen to Italy when it discovers that it is impossible to stay within the austerity straight-jacket?”
Euro zone officials believe that the zone can easily withstand a Grexit. They may be correct, but in the longer run, as Greenspan points out, the pressures will grow in several southern European countries and others will leave the zone.


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