Greece spent a lot of its history in sovereign default

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What were they thinking? NZ government super fund loses the lot on loan to already failing bank in one of the PIGS.

Portuguese bank

A Portuguese bank on the verge of collapse – what were they thinking?

That would have been the response of many newspaper readers this morning upon learning the New Zealand Superannuation Fund has lost nearly $200 million in taxpayers’ cash on a "risk-free" loan it provided to Lisbon-based Banco Espirito Santo (BES) on July 3.

The loan – part of a US$784 million credit package US investment bank Goldman Sachs put together through its Oak Finance vehicle – was made exactly one month before Portugal’s central bank broke up BES and split the country’s biggest lender into two, with one part holding the good assets and the toxic assets placed in the other.

Unfortunately, the Oak Finance loan is now stranded in the so-called "bad bank" following a retrospective law change by the Bank of Portugal.

Christopher Adams: What were they thinking? – Business – NZ Herald News.

Portuguese junk bonds bank of New Zealand super

This is what the 2015 index of Economic Freedom has to say about Portugal on the rule of law:

In 2013, the OECD expressed concern over Portugal’s reluctance to crack down on foreign bribery, particularly in regard to its former colonies Brazil, Angola, and Mozambique.

Since 2001, Portugal had officially acknowledged only 15 bribery allegations, and there had been no prosecutions. The judiciary is constitutionally independent, but staff shortages and inefficiency contribute to a considerable backlog of pending trials.

2014 index of economic Freedom

Euro-area industrial output in 2014, still 12% below 2008 levels

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A 1930s-style depression = 1930s-style politics

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Economic policy uncertainty in the European Union

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Source: Nicholas Bloom (2014)  – all data at www.policyuncertainty.com. Data normalized to 100 prior to 2010.

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Avoiding Lost Decades: European Edition | Econbrowser

useupix1

via Avoiding Lost Decades: European Edition | Econbrowser.

Are we reliving the 1930s?

Great Depression v. Great Recession, United States GDP

Great Depression v. Great Recession, United Kingdom GDP

Great Depression v. Great Recession, Europe GDP

via Are We Reliving The 1930s?.

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Deirdre McCloskey on the latest crisis in capitalism

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The Greek great depression

Europe has extensive experience with currency union break-ups

  • The Latin Monetary Union (LMU) joined Belgium, Italy, and Switzerland together with France in 1867. The arrangement managed to hold together until the generalized breakdown of global monetary relations during World War I.
  • The Scandinavian Monetary Union (SMU) formed in 1873 by Sweden and Denmark and two years later by Norway. This was disrupted by the suspension of convertibility and floating of individual currencies at the start of World War I. the agreement was finally abandoned in 1931.
  • The Austro-German Monetary Union was dissolved in less than a decade following Austria’s defeat in the 1866 Austro-Prussian War.
  • The only truly successful monetary union in Europe came in 1922 with the birth of the Belgium-Luxembourg Economic Union (BLEU), which remained in force for more than seven decades until 1999.
  • Europe in the twentieth century has also seen the disintegration of several monetary unions, usually as a by-product of political dissolutions.
  • A celebrated instance is after the Austro-Hungarian Empire was dismembered by the Treaty of Versailles. Almost immediately, in an abrupt and quite chaotic manner, new five currencies were introduced.
  • There also have been British and French currency unions with and between colonies.

Since World War II, economies have exited currency unions at an average rate of one per year.

Andrew Rose found

…that countries leaving currency unions tend to be larger, richer, and more democratic; they also tend to experience somewhat higher inflation.

Most strikingly, there is remarkably little macroeconomic volatility around the time of currency union dissolutions, [emphasis added] and only a poor linkage between monetary and political independence.

Indeed, aggregate macroeconomic features of the economy do a poor job in predicting currency union exits.

Rather than saying Euroland cannot fall, the discussion should be dissolutions of currency unions are common, especially when Greece is a member. What happened? How was it done?

HT: Monetary Unions.

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