Euroland Hardball? Atlanta Rumors

One hears things in the hallways of American Economic Association meetings, and I heard some rumors from sources who will remain anonymous but are well connected at the recently finished meetings in Atlanta. So, when the new Greek prime minister came into office in mid-December, George Papandreou, what had been reported as a budget deficit of around 6-7% of GDP, already unpleasantly above the Euroland official limit of 3%, turned out to be more like 12-13%, if not worse. Spreads on Greek bonds have gone way up, and there is a sense of crisis on the nation's foreign indebtedness. It needs help from the ECB and the Eurozone countries more generally or else faces tough cuts. These are probably coming anyway, but Papandreou is resisting somewhat. The rumor is that hardball negotiations are getting going between him and the effective leaders of the Eurozone, Merkel and Sarkozy. The latter will be putting a lot of pressure on Papandreou, but he may use the threat of removing Greece from the euro as a counterpressure. Now many might suggest that this is not much of a counterpressure, given that various eastern European countries are begging to join the euro in the current situation, as is even formerly aloof Iceland (not even in the EU yet). However, it is probably the case that Merkel and Sarkozy do not wish to open the door to having countries leaving the euro (as others might be tempted to follow if a devaluation by Greece works out well in terms of employment growth). France and Germany have worked very hard over a several decade period to make the euro as solid as the Deutsche Mark, and having anybody leave might trigger a more general unraveling of the euro, something long forecast by some US observers such as Martin Feldstein.

It occurs to me that the rise of the US dollar over the last month from around 1.51 to the euro to more like 1.43 might in part be due to the worries about such possible defections (even though presumably the countries still on the euro would be "stronger" ones). At a minimum this will probably scotch any moves to make the euro replace the dollar as the major world reserve currency in the near term (and other alternatives such as the yuan/renmimbi are nowhere near being ready to step in). I must also note that this recent rise of the dollar rather makes ridiculous recent reports, such as one in the Washington Post today, that the rising price of oil in the last few weeks is due to the falling dollar. What falling dollar? I continue to be astounded by the decreasing competence of newspaper reporters on economic matters.