The Eurozone Crisis: A Fools Guide
Economics, politics, and journalism are three professions that love, even rely on, the illusion of complexity. Don't believe me? Look at the Greek crisis. More complex answers for seemingly complex questions have been offered up time and again by all three parties mentioned above. But months later, aside from confusion, what have they produced? So here is my simple guide to all the fools out there about what I think and how simple the options really are.
Option 1) Kick Greece out of the Euro. That solves the issue of "Contagion" right there, or does it? As Tim Worstall noted in a recent article: Now Spain Circles the Drain, published online at Forbes "What's happening in Spain is not contagion...The place is going bust because of its own actions, not as a result of some infection from Greece. So a solution to the Greek problems, whichever way that works out, will not become a solution to Spain's problems."
So removing Greece won't solve the contagion issue. It will however shake the "Union". In the United States we had some states try to leave the Union back in the 1860's and that resulted in a bloody war that nearly destroyed the USA as we know it today. Now I'm not predicting hundreds of thousands dead in a war or anything like that. But I do expect political, economic, and social, fallout that is difficult to quantify at this point. It could perhaps lead to bank runs, rioting, and unease in other countries that might be next on the chopping block. Investors could pull out capital in advance from these countries with this uncertain climate. Bond prices will skyrocket pushing these countries with questionable balance sheets closer toward the brink. Finally, banks will pull back on credit to these areas, unemployment will rise as a result of all this, reducing the countries tax base, and increasing the need for social assistance which will push them even closer to the brink of insolvency.
Option 2) Bail them out at the expense of the Euro. There has been a slow and steady bank run in Greece these last few years. Consumer deposits are shrinking and corporate deposits are drying up even faster as people there brace for the possible reintroduction of the Drachma. The solution would be ECB liquidity injections into troubled banks, setting up a FDIC type body to oversee all Eurozone deposits, and issues a definitive statement regarding the solidarity of the Eurozone. This would re-inject some badly needed confidence in the Eurozone. Confidence in the political climate allows people to quantify their total risk more accurately.
The downside is pretty obvious. Greece has no incentive to get it's books in order and other countries may follow suit expecting their own bailout. The Euro declines against major currencies for a while, unemployment will remain high for a couple years until institutions are recapitalized and credit begins to flow again. Growth would be slow and limited for many years. Prosperous economies like Germany would suffer as a result of others wrongdoing which is why there is a great deal of opposition from Germany for this plan.
In fact, Juergen Fitschen, the designated co-chief executive of Germany's largest commercial bank, Deutsche Bank recently was quoted saying "Greece is the only country that we can in my view call a failed state. It's a corrupt state, it's political leadership is corrupt."
For this option to happen it would require the Germans to be onboard and I just don't see that happening. So option 2 is not very likely.
Option 3) Greece elects a government and gives into austerity. Well, I don't even need to go into this one. All major polls indicate that the Greek people are not interested in giving up their government jobs and social programs. Even more recent polls indicate that Greeks are not interested in staying in the Euro. A Politbarometer poll by ZDF TV published on Friday showed that only 31% of Greeks want to stay in the Euro while 60% are opposed. The election of an austerity friendly Greek government I put as my least likely outcome.
So it looks like the least desirable option will be taken and Greece will be kicked out of the Euro. The question then becomes how messy will the exit be for the remaining Eurozone members? I am expecting that if Spain doesn't get it's books in order following the Greek exit it will be next on the chopping block and that could be the beginning of the end for the Euro experiment.