Tuesday, February 17, 2015

Greece Is One Problem of Many for the European Union

Here's something we wrote in 2013, writing about Greece and its possible exit from the euro:
  • The European monetary system still has fundamental design and execution flaws that make it unstable in most environments;
  • It offers peripheral members few real benefits except access to easy credit; 
  • Unless the peripheral countries undertake real economic reforms, the austerity medicine may make the patient better, if it hasn't killed him first;
  • French, European and Italian banks need to take their medicine and acknowledge the diminished economic values of sovereign debt on their balance sheets;
  • The continuing struggle for EU power between France and Germany is very analogous to the struggle between our two sides in Congress.  Despite all the nice rhetoric and the ECB posturing, their divergent interests still limit the effectiveness of the monetary union. 
What has changed, after all the posturing by the Greek governments,ECB, the Eurocrats, Chancellor Merkel, President Hollande, the IMF and all the other zombie actors on the European stage? In terms of events, lots; fundamentally nothing has changed.  

Greece has sung out of the austerity hymn book, and it has received substantial transfers, all with different names.  Although its ratio of debt to GDP has come down from its peak, it is still unsustainable and no amount of austerity can save the situation without a currency devaluation lever to help the demand side; the euro has taken this instrument away.  So, point number one is still true, as is point number two.  Greece got its bailout money, much of which comes due in 2015-2016 and which cannot be repaid, only re-restructured. 

The austerity medicine is killing the patient, as no real reforms have been undertaken.

Economic storm clouds lie over several economies, some peripheral and one core.  Dumpster diving was prevalent in nice Barcelona neighborhoods several years ago.  The latest Eurostat numbers for 2013 show youth unemployment rates of 42% for Spain, 29% for Portugal and 49% for Greece.  What's worse, the rate is 30% for Italy, a much larger economy.  

There can never, and should never, be any fiscal harmonization as the Eurocrats advocate, solely for their own perpetual employment.  Right now, the individual social compacts between Spanish voters and their government is at risk.  If their leaders really have no real economic levers to make their economies more globally competitive, and Spanish leaders look to Bonn and Brussels for a handout, then why not just take to the streets and kick them all out?  The last time I looked, the ECB does not have an army, so they would be no help. 

Chancellor Merkel has beaten on the fiscal responsibility drums for several years, and Germany voters couldn't accept mutualization of EU peripheral country debt.  Fine, but if the euro is to be something beneficial for all its members, the current system and its architecture have to be razed.  Germany has to show leadership, but it can't.

It's self-appointed co-star, France, will always be on the stage beside Germany, and its economy continues to need fundamental reforms on the domestic front. France will never let Germany take the lead in defining a new European monetary system. The Brussels bureaucracy won't let itself be unwound. 

I have listened to several webcasts from really smart economic and financial economists from Chicago Booth and various European think tanks. They are out of ideas. A Grexit would be "catastrophic," but all of the various costumes put on maintaining the status quo can lead to a Greek tragedy eventually. 

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