If The Euro Keeps Dropping, The G7 Will Have To Step In With Its Big Stick

greece strike

Yesterday’s announcement of European “support” for Greece was badly bungled. 

The Global Crisis Fighter’s Guide to the Galaxy clearly states that when “markets overreact… policy needs to overreact as well” (see Larry Summers’s 2000 Ely Lecture to the American Economic Association, American Economic Review, vol. 90, no. 2, p.11; no free link available – and yes, I know that the White House doesn’t always follow its own playbook). 

This definitely does not mean: Vague promises to provide some support in an unspecified fashion in return for some policy actions to be specified later.

Irrespective of your view on how much fiscal adjustment Greece needs vs. how much German taxpayer money it deserves (or can realistically expect), you need a different approach – much more concrete and detailed.  The only good news yesterday was that the IMF will play a slightly greater role than previously expected, but even this change was a nuance missed by everyone – and who knows where it will lead.

If the euro continues to depreciate as it has so far today, the G7 will need to weigh in. It’s not that the G7 can, in the short-term, do anything at all.  But in the highly ritualized theatre of speculative attacks, the G7 carries the big stick – the threat of currency intervention.

Read the rest from Simon Johnson at Baseline Scenario –>

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