The Euro-Zone’s Last Chance

Challenges facing Greece:

  • Debt/GDP ratio of over 150%, forecast to be 170% by 2013.
  • An uncompetitive economy with only two primary economic drivers: Tourism and shipping.
  • Greek government revenue declined sharply in May 2011 while government spending rose sharply, leading to a large step backward and a further widening of the deficit.
  • A government which is in turmoil and a population that feels betrayed by politicians and the Greek elite.
  • Widespread public outrage against proposed EU/IMF austerity measures and state asset sales; 76% of Greek citizens believe government measures cannot fix the economy, 74% of Greek citizens want a renegotiation of the 2010 bailout terms.
  • A culture of pervasive tax evasion which won’t change overnight
  • A bloated & inefficient public sector which has run up a significant percentage of the debt that currently plagues Greece
  • The last and probably most controversial bullet point – A failure of the private sector in Greece to move the country forward and to become competitive with other EU economies. Greece suffers from entrenched cultural handicaps such as the widespread practice of nepotism in corporations and small businesses. Say what you will about the United States, the great strength of American business is a culture of meritocracy which has rewarded the best and the brightest who have achieved and innovated. Young talented Greeks who do not benefit from having a wealthy pedigree aspire to work in the public sector, not the private sector. This is the polar opposite of the United States where highly skilled/talented individuals strive to remain in the private sector and to start their own businesses.

 

 

Hat tip: Michael McDonough (@M_McDonough on Twitter)

Greek exports outside of the EU remain weak while the economic crunch has clearly taken a toll on consumer purchasing power/imports.

Challenges facing the euro-zone:

  • Hyper-competitive Germany tied into the same currency union with economic laggards Greece, Ireland, Portugal, Spain, etc.
  • Remember that before the euro, the Deutsche mark was a strong currency, the Italian lira was a weak currency, the Greek drachma was a weak currency, the Portuguese escudo was a weak currency, etc. Why would anything change with the introduction of the euro? None of these countries have changed over the past decade.
  • The ECB is charged with conducting monetary policy for the 17-member euro-zone with a primary mandate of maintaining price stability. This is no easy task considering the widely varying economies within the euro-zone. Never before has such a monetary policy experiment across borders been attempted.
  • Addressing countries that are essentially fiscally insolvent without a federal fiscal authority with enforcement/legal powers in each member state. Thus far, the euro-zone continues to address solvency issues with liquidity measures such as ECB credit lines and bailout mechanisms which are little more than massive lines of credit.

These bullet points aren’t meant to be comprehensive, in reality I could write several hundred pages and I would still be unable to delve into every detail of the euro-zone debt crisis. However, I believe I have addressed the most important issues.

The euro-zone leaders have an opportunity to step up and emphatically demonstrate that they are serious about keeping the euro-zone intact. This means taking extraordinary actions and moving much more rapidly towards a federal/super-sovereign approach. I believe that if euro-zone leaders/politicians continue to ‘extend and pretend’ the demise of the euro-zone will come much more swiftly and painfully than it would have otherwise.

Some commentators have stated that Greece is the problem, they claim that Greece should never have been allowed into the currency union and that Greece must leave the euro-zone. While others have stated that Germany’s hyper-competitive economy is too strong for the other euro-zone members to compete with on a level playing field. Therefore, they argue that Germany should leave the euro-zone and go back to the Deutsche mark. There are flaws in both arguments: First of all Greece is a symptom of a much larger global problem, Greece did not lend itself 330 billion euros, the global banking system/financial markets loaned Greece 330 billion euros under an EU rubber stamp with the help of some sneaky swaps and off-balance sheet financing vehicles. Moreover, if Germany were to leave the euro-zone I believe that the euro would cease to exist. Without Germany’s economic might, the euro would lose most of its prestige and interest rates for the other euro-zone members’ sovereign debt would skyrocket overnight.

I agree with Matthew Lynn, who wrote in his excellent book “Bust: Greece, The Euro, and the Sovereign Debt Crisis”:

“In short, the euro didn’t leave any room for error. The perfection of the plan was one of its key assumptions, and so was the honesty and straightforwardness of everyone participating in it. Once it collided with the real world, of course, that meant it was doomed from the start. It joins a long list of schemes undone by the arrogance and hubris of their designers.”

“To save the EU, the euro needs to be dismantled”

EU leaders have one last chance to at least attempt to save the euro-zone by cutting Greece’s debt in half and spreading the losses around throughout all parties involved (ECB, EU, private creditors i.e. banks etc.) and creating a federal fiscal authority similar to the US Treasury. Of course, there is much more to be done but this would be a good start. Let’s see what happens, I have my popcorn ready. Two final points:

  • Austerity will not bring Greece out of its downward economic spiral, instead it will cause more resentment, discontent, and a less motivated workforce.
  • Insolvency cannot be solved with more debt and/or liquidity provisions such as credit lines.

 

Euro-zone related links:

Kicking the Eurocan- Krugman

Can Europe rescue its single currency?- The Independent

EU Officials seek Greek fix- Bloomberg

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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