Legal Commentary

How Do California and Greece Compare?

By Kenneth Anderson

The WSJ?s ?Heard on the Street? has an interesting item today comparing California and Greece from the standpoint of the bond markets.  Bottom line is that California fares far better than Greece in investors? minds.  It?s a question, of course, how much of that is attributable to how investors see the underlying economies of each place and, instead, how investors are pricing the sugar daddi, er, the US government and EU-Eurozone institutions that might be called upon to offer a bailout.  But in terms of spreads, take a look at this chart from the story:

Thus the article notes with respect to Greece?s dire situation:

Adoption of the euro, by removing the threat of currency fluctuations, encouraged yield-hungry investors to bid up Greek bonds. Leverage allowed Greece to run big current account deficits, despite low productivity growth. The result, once the credit bubble burst, is today?s crisis. There is no easy European fix.

Greece has two main options to restore competitiveness and narrow its current-account deficit: Withdraw from the euro and devalue, or win large and ongoing transfers from European states with surpluses like Germany.

Leaving the euro looks unpalatable. Bilateral transfers to Greece, even dressed up as loans, would be hard to sell to German voters. And such aid wouldn?t address Greece?s lack of competitiveness. Only grinding domestic deflation, with the risk of social unrest, or withdrawal from the euro could do that.

The imposition of EU ?discipline? on Greece in return for transfers would represent creeping political union of an undesirable kind ? one forced by Germany for fiscal reasons rather than one negotiated by member states. But Greece?s saving grace may be a default there would likely drag down Spain and Portugal. Such a risk will concentrate minds in Europe to find a solution, even if a bailout would not answer the question of the euro?s suitability for uncompetitive Mediterranean economies.

I?ll take up separately the question of California.  Likewise the question of political economy in the Eurozone ? currency union without political or fiscal union?  But the article essentially thinks that California is saved not by a better internal structural economy, but instead because of its place deep in the heart of its guarantor.  California has better political hold-up.  It?s got better positioning to be able to force the US as a whole to internalize its difficulties, in ways (according to the article) that Greece will likely not be able to do with German voters.

Full post as published by The Volokh Conspiracy on February 08, 2010 (boomark / email).