More trouble from Greece may threaten the euro

Alasdair Macleod – 9 February 2010

I have a sneaking regard for the ordinary Greek. He has no respect for government and goes his own way. He knows that in all reality, this is the way his world works. If he needs an operation, €2,500 gets him to the front of the hospital queue, and traffic offences are not pursued so long as the right palms are crossed with cash euros. He does not pay his taxes either, because what’s the point? Why subsidise the bureaucrats who already take your bribes?

The truth is that the Greek economy works very well, because one third of it is on the black market. The bit that does not work at all is the public sector. This is important because the Greek Government is blaming tax evasion for its difficulties. Its promises to take measures to collect these taxes are a major plank in its deficit reduction policy, and it has appeared to convince the EU that this policy is credible. This is as credible as politicians are gullible. Economists seem to be gullible as well. Joseph Stiglitz, another daft Nobel prize-winner, says “there is clearly no risk of default”.

Instead, pursuing the ghost that is the black market allows government spending to continue without the necessary rationalisation to put national finances on a credible basis. It also seeks to damage the only part of the economy that really works. Practical people know this, including the EU and ECB officials involved with trying to stop the rot from spreading to other euro-currency states. However, these officials are actually powerless, because Greece has always been in breach of its obligations, and Article 104 of the Maastricht Treaty expressly forbids a bailout, as does Article 21 of the statute establishing the ECB. The result is that everyone in officialdom is trying to soft-soap the markets into believing there is no problem.

That they are doing so is obvious to all, but there is a general assumption that the EU and the ECB will rescue Greece if it has to. The assumption ignores the tricky fact that a rescue is actually forbidden, and begs the question as to who is to pay for it if that hurdle is overcome. There is no such thing as a Plan B, or indeed a central fund to deal with unexpected difficulties. It will fall to individual nations within the community to divvy up. Thinking through the mechanics of such a process highlights the difficulties. The problem is at sovereign level rather than with the ECB, and presumably the optimists think that a summit of France, Germany and perhaps the Netherlands and Belgium will be called to resolve it if necessary.

We can disregard the Low Countries: Belgium’s finances are not much better than Greece’s and Holland is not big enough to be much more than a me-too. France is traditionally introspective, is not in a financial position to help much, and has not the political resolve to do anything more than make lots of diplomatic noise in French. This leaves Germany.

Germany has certainly been a stalwart of Europe in the past, and the euro is essentially a widely adopted deutschemark. She has always been the principal backer of the European project, so perhaps markets believe, based on past experience, that Germany will rescue Greece and stop the rot spreading to Iberia and Italy. This glosses over domestic German opinion, which sees the Greeks as idle, dishonest, in a mess of their own making, and relying on German tax-payers to bail them out.

Of course, Germany has little alternative. Failure to rescue Greece will lead to an escalation of the problem to include Portugal and Spain at the least, and put terminal pressure on German banks. The problem is how long will it take for German politicians to accept this reality, and what price will they extract to satisfy the German electorate?

The solution to the developing crisis will be neither quick nor easy. The markets, therefore, are likely to force the pace, and in doing so start the beginning of the end of the euro, and possibly the European Project. This is only just for a construct that sets firm rules that its members have then broken with impunity.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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