Wednesday, 22 August 2012

Grexit is not an option

Yesterday, Antonis Samaras, Greece's Prime Minister stated that a return to drachma would mean another 5 years of recession for his country, unemployment reaching 40% and could potentially be the end of democracy for the nation. What Samaras did not mention, however, were the effects this might have on every other European country.

First of all, a large Europe-wide economic downturn would occur, given that banks which still have money in Greek bonds will find out that their investments have vanished into thin air. This would mean that governments may have to bail-out several banking institutions. In countries like Spain, Italy, Portugal and Cyprus this would break them down, and it might even be a severe blow in "strong" nations like Germany (Deutsche Bank's balance sheet is about 80% of Germany's GDP. You may imagine what would happen if another 1 or 2 German banks face problems). This would lead to countries asking for financial assistance from the ECB/EFSF/ESM or basically anyone who is willing to lend them. As individual investors would be too terrified to lend, EU officials will face two options:
(i) let all countries which cannot help themselves fail
(ii) bail-out all EU nations in need for help

If option (i) is chosen, then what would happen next would be the death of both the European Union as well as the Euro (for consequences around the world if this occurs read The Effects of a Euro Collapse). Option (ii) would mean that the EU and the Euro will survive, but with a longer and harder recession than the one Greece is now facing. Thinking backwards, if the EU officials enjoy their jobs and were to choose option (ii) why not keep bailing-out Greece, especially now that the worse is gone and all they ask is time (fine maybe and a couple of billion as well)?

A recent poll in Finland indicated that 66% of Finns want their country to avoid shouldering more financial responsibility, even if it would save the euro. Hmm since when does asking people with no apparent knowledge on economics what to do has become a good policy? Of course the Finns have their Grexit scenarios. Every country should. What they should not be thinking is exiting the euro. If the situation is bad now, what do you think would happen if a country changes currency? First of all inflation would hit them so hard, it would take years before they can be competitive again.

What the Finns are saying is that they do not want to pay for other peoples' messes. True, why should they? Nobody would want that. That is why the ECB should make a direct intervention to prevent fragile economies from breaking down. ECB money is neither Finnish, nor German nor Greek. It's ECB money. It's EU money. Money that should have been in the system from before and not wait until now. At least now is still not too late.

No comments:

Post a Comment