Wharton video lecture by Wharton finance professor Franklin Allen at a keynote address at the recent Wharton Global Alumni forum in Milan.
30 minute lecture is well worth listening to, no matter what your field is.
- when EU was created and today, very few countries, including Germany, could fulfill SGP(Stability & Growth Pact) of EMU(Economic and Monetary Union)
- SGP rules focusing on low debt and low deficit spending seemed to have very little effect on long term economic growth, based on empirical data from non-EU OECD(free market) countries
- only rich Scandinavian countries such as Sweden and former Soviet bloc such as Estonia seemed to be able to abide by SGP rules
- spread b/w in government bonds of different EU countries such as Germany and Greece was unrealistically low when EU was created, rates today are more realistic
- 3 possible solution to Greek sovereign debt problem: austerity, fund transfer, and temporary exit/sovereign debt default
- austerity measure: unsuccessful, based on empirical data, resulted in economic contraction, higher unemployment, and decreased government revenue, making debt servicing/repayment more unlikely
- fund transfer: already starting to happen and in long term necessary but EU is not ready due to lack of political union, this may change in 20-30 years
- temporary exit/sovereign debt default: optimal solution backed by historical/empirical data. Taking examples from Argentina, Korea, etc., default and exit from EU/Euros currency accompanied by re-assertion of drachma(native Greek currency) with exchange rate adjustment should result in rapid economic recovery w/in 1-2 years, 3 at most. Has happened in other countries which followed similar path historically speaking.
If the points talked about in this lecture is correct and Greece does engage in temporary exit, followed by re-assertion of native currency drachmas and exchange rate devalution, Greek asset should be deeply discounted and a "BUY" in investment terms.
Direct YouTube video lecture link: http://www.youtube.com/watch?feature=player_embedded&v=2wAfrrIIVpE#t=934s