#1. Events in Greece underscore the myriad problems associated with what has become a common and entirely wrong-headed strategy by national policymakers to tie their own hands by abandoning their national currency. There are several different mechanisms by which national policymakers in countries with relatively weak economies have instantiated this strategy: in Greece and in other countries in the eurozone it is obviously through the adoption of the euro; in the post-Communist countries on the eastern end of the European periphery policymakers are pegging their national currencies to the euro using different types of hard currency peg arrangements and/or quasi- or full currency boards (e.g., Latvia, Estonia, Lithuania and Bulgaria); and in many countries in Latin America the US dollar has been and still is used as the national currency (e.g. in El Salvador).

Diverse economic, political and historical factors drive the decision to abandon the national currency through these arrangements, of course. But what these arrangements have in common is that they make it impossible for national policymakers to utilize currency and monetary policy as a tool of economic adjustment. This loss of policy space comes as no surprise: indeed, in the years prior to the current crisis neo-liberals praised these arrangements that tied national policymakers’ hands for precisely this reason. Since policymakers in the peripheral countries couldn’t be “trusted,” wasn’t it better to outsource currency and monetary policy to rich countries by replacing the national currency with a hard one (such as the US dollar or the Euro)? On these grounds, for instance, neoliberals celebrated Argentina’s currency board for much of the 1990s—at least, until its problems became too obvious to ignore. At that point, revisionists recast the country’s currency board as villain instead of savior.

Critics of neo-liberalism have long warned of the problems that occur when weaker economies lash themselves to the mast of a stronger currency, such as Greece has done with the euro. Instead of being able to deploy expansionary monetary and fiscal policies and a currency devaluation in the face of the global economic crisis, the Greek government is desperate to convince investors and the European Commission that it is serious about contracting the public sector and fiscal spending. The crisis in Greece and many other countries that have tied their own hands, such as Latvia, suggest that this is a highly opportune moment to rethink policies that eliminate policymaker discretion and/or that prioritize stability for investors above all other economic goals.

#2. Another interesting feature of the Greek situation is that the EU seems to be outdoing the IMF in terms of a rigid commitment to fiscal contraction. As the current global crisis continues to unfold, the IMF has (uncharacteristically) been loosening (though not eliminating) fiscal constraints in some of the countries where it has stand-by arrangements in place. The IMF has even allowed some program countries to raise their fiscal targets, in some case substantially, and in some cases several times (e.g. Ukraine, Hungary, Latvia, Romania). Unfortunately, this hardly means that the IMF has renounced its tendency to engineer pro-cyclical responses to crisis or that it is has done nearly enough to ease the dislocation of the crisis, especially in low-income countries. But you know that things are strange when the EU seems to be channeling the IMF circa the East Asian crisis, sternly lecturing Greece’s policymakers about the need to reign in spending, cut public sector jobs, slash wages. Maybe some of these things have needed to be done in Greece—maybe not. But a global recession surely is not the time to make radical reductions in public programs—as even the IMF is acknowledging begrudgingly in certain cases.

#3. Finally, the Greek situation underscores the role of derivatives and currency swaps, shady accounting and predatory financial practices in the current crisis. Of course, we have already seen these things writ large in the US’ financial implosion. But I must admit that it is fascinating now to learn that the Greek national government used off balance sheet transactions, engineered by major Wall Street firms, to “cleanse” its books so as to hide vast amounts of debt from those with (what turn out to be not so) sharp pencils in Brussels (see, e.g., New York Times, 14 February 2010, p.A1, http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=2). In the European context we should remember that creative accounting is not just the preserve of the Mediterranean countries of Europe—it has been long known that France and Germany massaged their budget deficits in the late 1990s.

This matter requires further research, especially to see if other national governments used complex, opaque instruments in the same way as Greece (and Italy) apparently did, and if the credit rating agencies missed this, too, when rating Greek sovereign debt. Though the odds are not strongly in its favor these days, one hopes for serious financial regulation in response to the crisis that prevents governments from using opaque financial instruments to cook their books.