Greek Exit Disaster...or Not

Townhall.com ^ | January 4, 2015 | Mike Shedlock

[Kaslin]

There's an amusing pair of headlines back-to-back today on what a Greek exit from the Eurozone might mean.

One view is catastrophic, the others is along the lines of no problem. Let's start with the catastrophe.

Economic historian Barry Eichengreen says Greek Euro Exit Would be ‘Lehman Brothers Squared.

A decision by a new Greek government to leave the eurozone would set off devastating turmoil in financial markets even worse than the collapse of Lehman Brothers in 2008, a leading international economist warned Saturday.

A Greek exit would likely spark runs on Greek banks and the country’s stock market and end with the imposition of severe capital controls, said , an economic historian at the University of California at Berkeley. He spoke as part of a panel discussion on the euro crisis at the American Economic Association’s annual meeting.

The exit would also spill into other countries as investors speculate about which might be next to leave the currency union, he said.

“In the short run, it would be Lehman Brothers squared,” Eichengreen warned.

Martin Feldstein [professor of economics at Harvard University], a longtime critic of the euro project, said all the attempts to return Europe to healthy growth have failed.

“I think there may be no way to end to euro crisis,” Feldstein said.

The options being discussed to stem the crisis, including launch of full scale quantitative easing by the European Central Bank, “are in my judgment not likely to be any more successful,” Feldstein said.

The best way to ensure the euro’s survival would be for each individual eurozone member state to enact its own tax policies to spur demand, including cutting the value-added tax for the next five years to increase consumer spending, Feldstein said.

He predicted that European politicians would “swallow hard once again” and make the compromises necessary to keep Greece in the currency union.

“While holding the eurozone together will be costly and difficult and painful for the politicians, breaking it up will be even more costly and more difficult,” he said.

Limited Contagion Thesis

Yahoo!Finance reports Germany Believes Eurozone Could Cope with Greece Exit.

The German government believes that the euro zone would now be able to cope with a Greece exit if that proved to be necessary, Der Spiegel news magazine reported on Saturday, citing unnamed government sources.

Both Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble believe the euro zone has implemented enough reforms since the height of the regional crisis in 2012 to make a potential Greece exit manageable, Der Spiegel reported.

"The danger of contagion is limited because Portugal and Ireland are considered rehabilitated," the weekly news magazine quoted one government source saying.

In addition, the European Stability Mechanism (ESM), the euro zone's bailout fund, is an "effective" rescue mechanism and was now available, another source added. Major banks would be protected by the banking union.

According to the report, the German government considers a Greece exit almost unavoidable if the leftwing Syriza opposition party led by Alexis Tsipras wins an election set for Jan. 25.

Competing Views on Funding Needs

Before taking a side in the above debate, let's take a look at competing views on Greek funding needs. Please consider a snip from SYRIZA Makes Fresh Pledge to Defend Greek Capitalism.

Analysts at Bank of America Merill Lynch, “think Tsipras will face a budget black hole of at least 28 billion euros in the first two years of his government, with nowhere to borrow from and 17 billion euros of repayments to make in the first year.”

In contrast, the Wall Street Journal reports Greece Expects Primary Budget Surplus for 2015.

Greece’s 2015 budget, submitted by the government to parliament on Friday, aims to meet the fiscal demands of the country’s creditors but comes without the prior approval of its troika of international inspectors.

According to the budget, Greece will achieve a primary budget surplus—before taking into account debt payments—of €3.3 billion ($4.1 billion), equal to 3% of gross domestic product, next year, which is in line with the country’s bailout program.

Overall, the government will record only a minor budget deficit of €338 million—equivalent to just 0.2% of gross domestic product—next year, in effect marking the first balanced budget Greece has produced in four decades.

Despite surpassing its budget targets for three years running, Greece is at loggerheads with the troika—made up of representatives from the European Commission, the International Monetary Fund and the European Central Bank—over further fiscal measures the country must take, as well as a number of promised overhauls.

Primary Account Surplus or Not?

Does Greece have a €28 billion black hole or a surplus?

Both can technically be true. The €28 black hole counts interest on debt including the €245 bailout package. The primary surplus theory ignores interest on the debt.

If the Troika suspends the bailout, then Greece will have no choice but to default. Of course, that points to the absurdity of the alleged bailout setup in the first place.

Even if the interest rate on the bailout was 0%, at €3 surplus every year, it would take Greece 81 years to pay back that debt!

Economic Reality

There is no realistic way Greece can ever pay back €245 billion, so it won't.

With that thought, let's return to the first question. Would a Greece exit be "Lehman Squared" or would it have little effect?

Actually, no matter what happens with Greece, the entire eurozone setup is unstable. Greece, Spain, Italy, and Portugal all are in impossible payback setups. Even if Syriza loses the next election, sooner or later Greece, Spain, Italy, or possibly even France will exit the eurozone.

The "limited contagion" view is complete nonsense. The eurozone debt problem is going to explode, and whether or not it becomes "Lehman Squared" depends on the response.

My view is the longer the ECB and EU attempt to hold this mess together with no debt writedowns, the bigger the catastrophe.

Greece will not cause a catastrophe, but the EU/ECB handling of a Greece exit is highly likely to do just that.

Eventually, Will Come a Time

As I said in my November 23, 2011 post Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Le Pen may be too early, and France may not be that country, but the time will come.

Greece, Finland, Germany, Belgium, and even France are possibilities. All it will take, is for one charismatic person, timing social mood correctly, to say precisely one right thing at exactly the right time. It will happen.

Possibilities

• Greece: Alexis Tsipras - Syriza (Radical Left)
• France: Marine Le Pen - Front National (Radical Right)
• Italy: Beppe Grillo - M5S Five Star Movement (Radical Left)
• Spain: Pablo Iglesias Turrión - Podemos (Radical Left)

Where to Point the Finger When it Blows

The pot is simmering and is likely to boil over at any time. When it does boil over, Greece will not really be to blame, even if Alexis Tsipras wins the election and carries out his threats.

Rather, be prepared to point the finger at the EU, ECB, and IMF for their collective insistence that Greece, Spain, Italy, etc. repay debt that cannot and will not be paid back.

By the way, there is a small chance Tsipras wins the election and Greece exits the eurozone with limited initial fallout. If so, the major problem will come when Spain or Italy does the same thing.

[SunkenCiv]

Greece entered the EU willingly, found out they couldn’t just keep getting free stuff, balked at the austerity needed to live within their means, has primary industries of tourism, food and tobacco processing, textiles, chemicals, metal products, mining, and petroleum (CIA World Factbook), oh, and pursuant to message #2, Detroit just went up 14 nothing on the Cowgirls.

[SunkenCiv]

Greece exit from the EU and Euro would mean they may as well print their national currency on toilet paper, just before they throw themselves at the feet of the IMF.

[Zhang Fei]

Greece is using the EU as a scapegoat. However, the problem in this instance isn’t the EU, which is subsidizing Greece’s welfare state, but Greece itself, which built the welfare state with zero compulsion from the EU, along with a sclerotic regulatory state more typical of less-developed countries.

[yefragetuwrabrumuy]

Those who are most frightened of a Greek exit are the Brussels bureaucrats, both because they seek the Greek people as their *subjects*, and because the aftereffects would be very closely watched by Britain.

If there wasn’t a major catastrophe, a British departure would almost be certain. And I’m better it wouldn’t be a major catastrophe.

Why? Because Greece is already mostly divorced from the rest of Europe’s economies. The only collapse would be based on a “crisis of faith” in the EU. And that would only last until somebody started buying the collapsed whatever at cut rate prices.

[Zhang Fei]

The Empire was essentially a trading bloc — albeit based on mercantalist theory, and heavily favouring Britain.

I wouldn't be too sure it favored the metropole. As the empire dissolved, British per capita income went up, whereas per capita income in the former colonies stagnated or went down. The British empire wasn't run as a tribute-exaction system for building Taj Mahals (unlike Indian ones, or just about every other non-European empire in history) - the colonies were expected to pay for themselves, but the idea was that trade would make all parties richer. And that did in fact happen - population growth in the colonies ramped up rapidly (except in India, where the population increased, but encountered periodic famines because it had hit Malthusian limits).

[Old Teufel Hunden]

" I was under the impression that the EU exerted some authority over England, but I guess that’s just not the case."

I believe you are getting two different organizations here confused. While the UK is not part of the Eurozone, the UK is part of the European Union. The Eurozone is an economic and monetary union of 19 European countries. This is what Greece is currently attempting to exit. They all share the same currency, but of course they don't share the same fiscal policies or share economies. When times are tight in Greece, they don't have the ability to control the money supply in their country. This is one of the reasons IMO that the Eurozone will never work. In order to share money, you have to be one country IMO for it to work. I believe the originators of this hoped that eventually all the countries on this would eventually become one country. That was the ultimate goal.

As a tourist, I love it. I can travel between all the Eurozone countries without any problems with customs at the border and I don't have to exchange my money. It's like going to a different state in the U.S. But when you travel to the U.K. or Switzerland, you are very aware they are not in the Euro. Because all the pain in the rear end problems of going through customs and exchanging your money come into play.

The EU has a congress that passes laws on it's member countrys and has representation from those member countries. That, the UK is part of.

[Nervous Tick]

>> Detroit just went up 14 nothing on the Cowgirls.

Cowgirls grew a sackful, eh? :-) Sorry about that.

[Cronos]

Your impression is correct, the EU does. But there is a difference between the EU and the Eurozone.

It is kind of confusing, so unless you live here and have the crazy visa rules, you wouldn't need to know or bother

But basically you have the European Union which consists of 28 states that basically tries to co-ordinate what they do and prevent wars between themselves (at least that was the original aim, right now it's a bureaucratic nightmare)

These consist of nearly all countries in the geographical construct called Europe with the exceptions of

1. Iceland
2. Norway
3. Switzerland
4. Bosnia and Herzegovina
5. Kosovo
6. Serbia
7. Montenegro (Czarna Góra)
8. Albania
9. Macedonia
10. Moldavia
11. Ukraine
12. Transdniestr Republic
13. Russia
14. Belarus

The best diagram I found on wikipedia

The Eurozone is a sub-group of the EU which consists of states that share a common currency -- the Euro.

I see the trade benefits of the euro -- it means less currency conversions, but also the bad side without political union -- you can consider it to be analogous, but not similar, to the US with different states having one common currency (but the difference ends in the sense that the US federal government has more control over states than the EU council does)

Anyway, so the UK is part of the EU but not part of the eurozone, which makes sense to it. Cameron and most other British politicians "political expression" is to leave the EU but remain in something like the EFTA which is what Norway and Switzerland are in. But that is stupid -- because Norway still has to follow European Union rules and laws (to some extent) but has no vote at the EU meetings

Better to leave all relations with the EU and be like the USA dealing with the EU

But that is not good for the UK either due to multiple reasons:

1. the UK has 49% of its external trade with the EU (the rest to non-EU nations) and is increasingly economically tied to the EU (it's inevitable, it's the nearest geographical market)
2. Most of the UK's financial business comes from Europe. If it leaves the EU, it loses a large chunk of it's work and blows a huge hole in its economy. It can't replace this with work from the Americas as New York is too strong here while in Asia it is losing heavily to Hong Kong and Dubai
3. The UK used to have immigrants mostly from the commonwealth (the Indians brought a lot of business and boosts to the economy, while the Pakis brought jihadis), but now they have migrants from Europe who also are integrated and not welfare slobs -- what would happen to them? If they leave, I don't think they could be easily replaced

Finally, to your point that the EU exerts some authority over the UK, it does -- but that's a very weak authority, so that the UK can reject paying fees asked by the central authority.

[Cronos]

btw, also note that “England” isn’t the same as the UK — England is just one of the 4 nations in the UK, the others being the Scots, the Northern Irish and the Welsh

[Cronos]

you are correct about the faults of the Eurozone which is why I prefer that my adopted land (Poland) doesn't join

The Euro was created as a political tool -- Mitterand wanted to bind a united Germany to Europe to prevent it ever dominating Europe (in hindsight, that looks stupid :-P), and that's why Latvia and Lithuania have rushed to join (they believe that by practically making themselves part of Germany they can keep the big bad Russian Eagle away)

But there should have been checks on basketcases like Greece from joining and there should be a mechanism to allow them to default (just as the US should allow Illinois to default for instance)

But big countries (and economies) that don't match Germany or France -- like Poland -- should not be allowed to join the Eurozone (and most Poles do not want to join it)

[Cronos]

The Brits tried the Commonwealth free trading bloc, but it was too lose. Right now Australia and India would prefer an Asia or Asia-Pacific trading bloc to one linked to an island in Europe

[Cronos]

It’s a Greek exit from the Eurozone. The Brits will only look at this to ensure they get their money back

[Cronos]

well, I dispute the population growth bit -- Australia and Canada were and are inhospitable places to live without some technology which the aboriginal peoples did not have

Also, the famines in India were to a large extent not managed due to political reasons -- case in point, the Bengal famine in the late 1800s. Independent India has not had any famine deaths

[SunkenCiv]

Thanks. The rescinded pass interference call was bogus, but Lions fans are used to that.

[yefragetuwrabrumuy]

India had some huge help in ending famine by perhaps the greatest humanitarian who ever lived, American agronomist Dr. Norman E. Borlaug.

http://en.wikipedia.org/wiki/Green_Revolution_in_India

Importantly, while times were good in India, everything went “to hell in a handbasket” in Bangladesh (East Pakistan) in the 1970s, in a trifecta of nastiness, including their violent split from Pakistan (ethnic reasons, though both were Muslim, the Bangladesh Muslims were orderly and the Pak Muslims were already the vicious fanatics they still are today); a massive refugee problem, with almost 7 million starving people flooding into India, where they got little support; and last, but not least, the Bhola cyclone, which killed a half million, followed by the slaughter of the Pakistan army butchering a quarter million or more Bangladesh civilians, mostly out of spite.

The starving refugees got nailed again while heading to Calcutta when a massive cholera epidemic hit.

[Cronos]

True, he was the greatest humanitarian. But there were hard times in the 50s and 60s and a democratic India managed to keep people from dying. This is not to downplay Dr. Norman’s work, just to point out that a democracy feeds its people unlike other types of gov

[Zhang Fei]

well, I dispute the population growth bit -- Australia and Canada were and are inhospitable places to live without some technology which the aboriginal peoples did not have

Britain exacted no tribute from the aborigines. It shunted them aside, and established an economy quite separate from theirs, apart from trading for basic necessities.

Independent India has not had any famine deaths

The independent Indian kingdoms prior to British rule had no shortage of famines. Independent India in the 20th century had the benefit of the Haber-Bosch Process, improved grains and pesticides and a number of other elements that are frequently summed up as the Green Revolution. I'd say the Haber-Bosch process was the most important element of that revolution. Once it became possible to make fertilizer in an industrial plant, famines since then have either been either the result of war or severe economic mismanagement (including utopian Marxist ones).

Pre-Raj Indian rulers built monuments to their vanity, like the Taj Mahal. The Raj built 4 of India's 5 major canals. The remaining canal was built only in the 1970's. All of that took tremendous amounts of capital, capital that pre-Raj rulers of India invested in jewels to decorate their palaces. Buckingham Palace looks austere compared to most Indian palaces, never mind the Taj Mahal.

You want an account of rapacious rulers? Just look up any Indian dynasty. Heck - look up any present Indian government - locking up sectors of the economy for their favorites just like the Indian aristos of antiquity. Independent India makes Egypt look like a well-run country.

[yefragetuwrabrumuy]

I would rephrase that by saying that Democracy gets government out of the way so people can feed themselves.

Again, a superb example of the opposite was found in Bangladesh. Being a river delta periodically fertilized by flooding, Bangladesh has some of the most fertile farmland in the world. However, they also had Islam and socialism.

While their version of Islam wasn’t the worst, their socialism was full-tilt, resulting in more per-capita government than even the US. And their largest government agency was the Department of Jute.

Jute is a low grade fiber used to make poor quality rope, mostly supplanted by hemp which is far superior. Nobody in the world wants jute. However, because with a good agricultural system, Bangladesh could easily feed the entire region, other countries handsomely subsidized the socialist government of Bangladesh to grow only jute.

The socialist government, as you might expect, squandered the money on making more government and bureaucracy, while promising to improve the standard of living, which never happened. So the people of Bangladesh, who could have had the standard of living of the Swiss in a few generations, have been kept artificially poor.

Back in India, Borlaug was joined by Dr. M. S. Swaminathan, a western educated Indian, who though at some point did work for a part of the Indian government, did far more to change their agricultural systems from outside of government. The two of them together were able to muster a huge amount of support from the west, and even UNESCO, who was mostly a western run UN agency.

And the two of them had enough pull in India to get around the hideous Indian bureaucracy, who could have ruined it all had they been allowed to.

[Gideon7]

And India’s penchant for socialism messes up its manufacturing capability too.

Ever notice that you almost never see ‘Made in India’ on anything at Wal-Mart? The reason for that is because it is unlawful in India to close an unprofitable factory or to fire a bad worker. This is why India fails miserably compared to China in exports. India’s socialist labor laws are to blame for keeping what should be an economy as strong as China’s down in the dumps.

It’s ironic that communist China is actually less socialist than democratic India. Anyone would be crazy to open a plant in India because of its socialist labor laws.

It’s is a shame, because a strong India could have counterbalanced China’s growing world hegemony.

Not to mention lifting hundreds of millions of people out of abject poverty.

Socialism kills.

[GeronL]

Also why people in India go to places like Mauritania to find jobs