Saturday, April 28, 2012

The Ongoing Collapse of Greece's M2

Greece is going through something equivilant or worse than the Great Depression that occurred in the U.S. and Europe in the 1930's right now.  One of the hallmarks of this is their recent spate of public suicides as reported on by Reuters here.

Athens in April 2012 (photo: Jake Zalium)

The effects that this economic collapse has had on the people of Greece is nothing short of a tragedy.  This is not to excuse the role that Greeks have had in creating an unbalanced society, but their participation in the Euro has made them unable to help themselves through monetary policy, and their fiscal situation has made themselves completely dependent upon other Eurozone countries to finance any fiscal remedies (which have been non-existant, and in-fact negative, or "austerity programs").  I believe that Greece should exit the Euro for their own sake.  It would probably not be the best action for the rest of Europe, but Greece is facing a fate far worse by staying in the Euro, than by leaving.

All of the catastrophic pain that they would experience over the immediate term after exiting would help alleviate the long term hopelessness of what is an impossible recovery right now.  The fact is that Greece cannot recover within a currency that refuses to devalue itself despite economic conditions.  The European Central Bank has offered a great deal of lending to Eurozone banks in an effort to stimulate private and public lending.  While that has had some effect, it has not reversed the decline of Greece's M2, which has been in a tailspin for the past two years.

To review, the M2 is one of the broad measures of money within an economy.  It includes currency, money in checking accounts, savings accounts and short term CD's.  The annual decline in the M2 for 2011 in Greece was 15%.  It was 10% in 2010, and down an additional 1.9% from its peak in September 2009.  This decline has continued to get worse in 2012.  That has been about two and a half years of continual decline in the M2 for Greece.  I do not know of a country that has had economic growth while also having declining M2.  It sounds impossible.  The worst part of this situation is that as long as Greece is that this trend looks to remain the same for as far as I can see.  Surely that is not forever, but I do not know how this will change with Greece within the Eurozone.  They have little to no control over their own macroeconomic conditions.
One of the ironies of a potential move back to the Drachma is that the ten year program to exchange Drachnas for Euros ended March 1, 2012; perhaps to be reversed soon.

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