The Corner

Euro, Ruble, Rubble

If Moscow is, as the old saying goes, “the third Rome,” could Athens (or maybe even Brussels) become the second Moscow? This New York Times Deal Book piece comparing the euro’s plight in 2010 with that of the ruble in 1998 is well worth a look.

It’s important not to make too much of the comparison (the degree of dysfunction within the mid-1990s Russian economy far exceeded today’s eurozone problems), but it is intriguing enough to be worth considering.

Here’s one key extract:

In Greece, the fund and European Union initially proposed a bailout of 110 billion euros, or $139 billion, last week. After markets reacted skeptically, European finance ministers met over the weekend and proposed a nearly $1 trillion financial support package for Greece and other weak euro zone economies. They proposed forming an investment fund guaranteed by the governments of richer European Union countries like Germany and France that would also draw on monetary fund money.

With Russia, the successive bailout proposals were quickly judged by the markets as too little, too late – as happened with the Greek crisis before the latest announcement.

“You need speed to put out a forest fire,” Anatoly B. Chubais, who was the lead Russian negotiator with the International Monetary Fund in the 1998 crisis, said in written responses to questions about the Greek bailout.

Edmond S. Phelps, a Nobel laureate and Columbia University economist, in a telephone interview cited a lesson from the 1998 bailout: lenders should announce their highest number as quickly as possible, to keep interest rates down and lower the cost of a bailout. International lenders, he said, need to go in “with all their guns blazing.”

Basic stuff, but ignored by Chancellor Merkel until, quite possibly, too late.

And then, of course, there’s this, the heart of the problem:

Back then, as now, a global economic crisis had rendered local economies uncompetitive at the existing exchange rates. Russia at the time had pegged the ruble to the dollar, Greece today is locked into the euro zone.

In Russia’s case, the prices for the country’s mainstay petroleum exports had plummeted the previous year because the economic contraction in Asia in 1997 had diminished demand. The ruble was under pressure to follow this trend downward. For many months, though, the Russian central bank kept the ruble pegged to the dollar — a dollar that was gaining strength as global investors sought a safe harbor.

Only after the Russian central bank finally did devalue the ruble in August 1998, which plunged by 70 percent within a month, did the Russian economy begin to recover. The turnaround was faster than anybody imagined. Within a year, Russia’s economy had recovered to precrisis levels and a decade of rapid growth followed. Banks rushed back to do business in Russia.

Russia’s oil woes back then may be analogous to the gap today between Greece’s and Southern Europe’s low productivity and the high salaries its workers receive in euros. But the fix may be harder to achieve.

“Greece, fundamentally, does not have a debt problem,” Mr. Nash wrote. “It has an economy which is not competitive at the prevailing exchange rate and which lacks the structural flexibility to become competitive.”


The problem, of course, is that the consequences of a Greek withdrawal from the euro could be disastrous, not only in Greece but beyond. In all probability it would lead to a massive debt default (de facto or de jure) of both the Greek state and a good chunk of the country’s private sector, something bound to have serious knock-on consequences elsewhere, particularly given the weak state of the global economy and the fragility of the international financial sector. A risky but possibly more adroit alternative would be for Germany (and other countries in the eurozone’s north) to pull out of the single currency, thereby regaining control of their own financial destiny (so far as that is within the power of any individual country). The “weak” euro left behind could then depreciate, giving the PIIGS the break they so badly need.


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