I asked a European economist what he thought the European Union would look like in a decade. Would it even still be there, I asked. He grimaced slightly as he answered, “Oh, I think it will still be there, but it will be a lot smaller and comprised primarily of northern European nations. You won’t see countries like Greece, Spain, Portugal or Italy in the mix anymore.” His casual observation was born of the inability, within the EU, to re-evaluate currencies as a way of differentiating countries with wide disparities in economic strength and approaches to local governmental spending and taxation practices.
If Teutonic Germans rigorously enforce tax collections, focus on living within their means and have no issue of general austerity when it comes to providing benefits to their citizens, it becomes very difficult to place that kind of a country into a single system where many of its partners have no stomach, ability or history to tax their wealthiest citizens (indeed, even small and medium-sized Greek businesses pride themselves on tax evasion), promise to deliver governmental jobs and benefits as the only way to get elected even when there is no possible source of governmental revenues to pay for it and there are no underlying engines that can spur growth to offer even that nebulous solution (e.g., the “I hope it happens again” American approach). That the Greek Finance Ministry manufactured false economic reports to get into the EU in the first place doesn’t help.
But if the EU is destined to crack, there will have to be a “first nation to withdraw or get pushed out” to begin this ugly process. That country would most likely be Greece. With Greece having virtually no chance of complying with the austerity measures it embraced when it accepted a general infusion of bailout funds from the EU, even after massive layoffs and cutbacks, Europeans have four choices: 1. Hold Greece’s feet to the fire knowing that Greece not only cannot deliver but is likely to fold under the pressure, 2. Give Greece an extension in time to comply with those measures, as it has requested, knowing that no matter what the period of the extension, Greece doesn’t have the prospect of necessary growth to come out of the program in the foreseeable future, 4. Create a new bailout structure where the EU puts a whole lot more money into Greece, accepting that it might not get paid back, or 3. Find a way to separate Greece, or at least the Greek currency, from the euro.
With cash-impaired Europeans balking at “throwing good money after bad,” the latter scenario may be the only sensible alternative, although expect a delay in the inevitable as a band aid that EU leadership will implement when they meet to discuss the issue on August 6th. Yet if being removed from at least the Eurzone at some time in the near term is the necessary solution, the pain and displacement that such a transition would cause is incalculable. To creditors expecting to be repaid in Euros, which would include vendors, banks, and governmental lenders, the likely result is a massive default, in which a worthless and highly inflated drachma would be the only currency Greeks could use to repay loans and pay for imports. Suitcases of cash might be the price of a cup of coffee, and mattress-hording with dollars or euros would pay off for those with the foresight to have stashed the cash. Euro-denominated bank accounts in Greece would be instantly converted to the new Greek drachma at the official exchange rate on the day of conversion, which probably would inflate to worthless almost instantly. Once the announcement of conversion from euro to drachma were announced, all Greek bank accounts would no longer be able to pay out depositors in euros.
But is such a massive default expected? And if so, what are the biggest financial institutions doing about it? “Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency… JPMorgan Chase, though, is taking no chances. It has already created new accounts for a handful of American giants that are reserved for a new drachma in Greece or whatever currency might succeed the euro in other countries…
“‘We’ve looked at many scenarios, including where one or more countries decides to redenominate,’ said Roger Griffith, who oversees global settlement and customer risk for MasterCard. ‘We have defined operating steps and communications steps to take.’ He added: ‘Practically, we could make a change in a day or two and be prepared in terms of our systems.’ … In a statement, Visa said that it too would also be able to make ‘a swift transition to a new currency with the minimum possible disruption to consumers and retailers.’” New York Times, September 2nd. Who are the clients that are preparing? Nobody really wants to say.
Many economists admit that the UK and the Eurozone are officially (in their eyes) back in the recession (GDP contraction over several consecutive months). The austerity program imposed the Conservative Party/Liberal Democrats coalition in the UK is becoming an increasing source of anger and disappointment suggesting an early reelection is not out of the question. Our own stock market has rallied on more than one occasion at the hint of possible solutions to the European debt crisis, even though the possibility of any near-term solution in beyond elusive. But if Greece slips under, the global markets will react fiercely, and no American political candidate, regardless of the policy direction taken, will be able to stop the damage to our own markets.
How likely is the end of Greece’s relationship with the euro? Top EU leaders insist that Greece is there to stay. But many in the private sector are taking the opposite view: “‘It’s safe to say most companies are preparing,’ said Paul Dennis, a program manager with Corporate Executive Board, a private advisory firm… In a survey this summer, the firm found that 80 percent of clients polled expected Greece to leave the euro zone, and a fifth of those expected more countries to follow.” NY Times.
Americans appear to be bad at learning from their own mistakes, and most certainly don’t believe that the failures of others could ever happen here. But why do programs that refuse to tax the richest segments of our society, even suggesting further cuts in the tax rate at the top, while increasing a bloated military budget and imposing austerity measures on everyone else sound a whole lot more like the programs that the Europeans have already tried with zero success?
Oh, maybe I’ve misspoken… the Europeans – with a comparably-sized population to the United States – spend only about 10% of what we spend to support their military. With all our budget cuts, we still account for 41% of the world’s military expenditures. Try this on for size (looking at available recent data): “Comparing defence spending with other macroeconomic data, in 2010 US defence expenditure represented 4.8% of GDP and 11.2% of overall government expenditure. In the EU these ratios were, respectively, 1.6% and 3.2%. As for defence expenditure in relation to the total population, the US spent €1 676 ($2 222) per capita in 2010, while the EU spent on average €390.” European Defence Agency. When are we going to learn the lessons of history and stop taking stupid pills?
I’m Peter Dekom, and the list of nations who supported military budgets that they could not afford, coddled the elites and pressured the masses is long… expired nations that exist today only in history books.
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