Irrational Greeks Reject Austerity?

       Lorenzo Bini Smaghi has been lambasthing the Greeks for their "irrationality" for not "taking their medicine; it's good for you!!" I tell you there is no analogy I've heard enough of more than this one-that the Greeks-and other euro countries-are naughty, shortsighted children that should just take  their medicine.

      What the Austerians seem not to get is that just because something tastes very unpleasant and bitter doesn't mean it's medicine. There are all kinds of unsavory things that immediately come to mind. Indeed, to call precisely the Greeks of all people irrational is perhaps at least rather ironic and yet LBS seems to have not the slightest sense of irony.

        "Lorenzo Bini Smaghi is fond of the word “irrational”. It appears several times in the article that Philip linked to yesterday. In particular, it seems that LBS thinks that Greek voters are irrational. Given that Greece is the birthplace not only of democracy, but of Euclid and the rest of them, it seems worthwhile querying the notion that Greek voters are irrational."

        http://www.irisheconomy.ie/index.php/2012/05/17/irrational-greeks/

        Yep. You've got to admit it's ironic at least to call the very people who basically gave us the whole concept of rationality irrational. If it weren't for people like Euclid, Socrates/Plato, and Aristotle there would be no such thing as rationality... LOL

         "One evidence of their irrationality that is sometimes advanced is that while they have overwhelmingly rejected the current austerity measures in a democratic election, polls also show that they would like to remain in the euro."

          Kevin O'Donnell points out that this is not so irrational. I mean it is wholly logically possible.

         "I guess the first best solution for Greeks is for Greece to stay in the euro, but for the current programme, based on multilateral austerity and internal devaluation, which has failed and indeed has no chance of succeeding, to be replaced with a programme which involves more debt forgiveness and more fiscal transfers from the centre. What is irrational from a Greek perspective about wanting this? That it probably isn’t going to happen is of course an important fact, but there is nothing irrational about wanting what is best for you."

          In a way both Angela Merkel and Mario Draghii on the one hand and the Greeks on the other are on the same page. I mean they both agree Greece should stay in the euro. No one is actually saying they should leave. Where then is the irrationality? Well, as O'Donnell points out it may be rather unlikely.

          I think it is-probably. I mean I agree that there is a real chance that if Greece refuses to honor the March agreement they could be out of the euro. Yet that assumes that Merkel is really serious. Oh I know she keeps saying she is. And she may believe herself I don't know. It's always possible that it's all just a bluff including this late speculation we've been hearing the last few days that the eurozone will be fine without Greece.

         In a way the negotiations between Greece and the EU are sort of like the negotiations between the Democrats and Republicans in Congress over the debt ceiling. Both try to establish the credibility of a threat. This year it's finally tipped in the Democrats favor as what the Democrats can threaten-the Pentagon cuts and the end of the Bush tax cuts is worse than anything the GOP can threaten about.

        It's the same thing in the EU. The EU wants Greece to believe that if they don't do austerity it's over with there is not even the slightest chance they can stay in the euro-indeed some are now trying to raise the fear that legally speaking if you drop the euro you must drop the EU-though we have a great counterexample of this like Sweden.

       Implicit in this threat has to be the premise that if Greece does leave the EU it will hurt Greece much more than the EU. This is debatable. It may be that Greece could actually recover that devaluation would be just the thing to give them a real shot in the arm a la Argentina. I definitely think that Merkel and company are overselling the idea that they can easily whether the loss of Greece.

       The market action the last few days says otherwise. We've seen depositors leaving Greek banks in droves which is has led to fears of contagion in Spain, Italy, and Portugal. These countries have already seen their borrowing costs skyrocket.

       It's possible that Greece leaving would actually hurt the EU more. From the Greek stand point I got to disagree with the irrationality wrap. If they can get the EU to bend at all great-that's the optimum scenario. If they can't then the next best option is to leave the euro.

      Which is preferable for the EU-for Greece to stay but break it's old austerity pledge or for Greece to go? My guess is for Greece to go is the worst case scenario. Arguments that this is wrong should be taken with a grain of salt as that's just another attempt to make the EU threat credible.

      Assuming I am right about this the question still remains whether the EU knows or does not know that their worst case scenario is for Greece to leave? That's the reason the chance of Greece staying doesn't look super great-it's not clear whether those who run the EU get it or not.