European debt crisis: The head-in-the-sand factor

EMU Gets Ostrichized

Paul Krugman, NYT

On my desk, right next to my gnome of Zurich*, I have a stuffed emu, picked up on a visit to Australia many years ago. That's what they used to call the euro project -- Economic and Monetary Union. And for a while, until the euro came into existence and created the illusion of success, many were the cartoons depicting the project as a hapless, flightless bird, related to the ostrich.

I think we need to bring that image back, because the head-in-the-sand factor is getting amazing.

First, Greece, where it has been obvious for a very long time, indeed right from the beginning, that the program had no chance of working:

"We knew at the fund from the very beginning that this program was impossible to be implemented because we didn't have any - any - successful example," said Panagiotis Roumeliotis, a vice chairman at Piraeus Bank and a former finance minister who until January was Greece's representative to the International Monetary Fund. Because Greece is in the euro zone, he noted, the nation cannot devalue its currency to help improve its competitiveness as other countries subject to I.M.F. interventions almost always are encouraged to do. 

At the same time, Mr. Roumeliotis and others note, the troika underestimated the negative effect its medicine would have on the Greek economy.

[snip]

* A phrase coined by a long-ago British chancellor of the exchequer, to condemn speculators. It was silly, of course: everyone knows that the gnomes actually live in Basel.

 (More here.)