It seems that the Greek standard of living will take a long-term tumble from its heights in the oughties. How much? We won’t know for a while, but maybe as much as fifty percent.
While there is clearly a significant AD channel at work, and some negative real shocks, I also see multiple equilibria. Investors have decided that Greek institutions are not so solvent and this raises risk premia and lowers long-term investment. In the oughties investors were guessing “Greece is a West European country after all,” and these days they are guessing “Greece is more like a Balkans country.” Reality follows in step.
Are macro multiple equilibria “most fierce” for countries hovering over a dilemma of mixed identity or a cultural chasm? No one doubts the cultural identity of Sweden and, if they have multiple equilibria, they may be quite close to each other in output space and also in cultural space.
Which other countries may incur especially high risk premia from multiple equilibria? Brazil? China? Where else?