Sunday, October 30, 2011

Greece Revisited

Exactly a year and a half ago I penned (tapped) a piece on the problem with Greece and by extension, the Euro. The observations made at the time were spot on. The closing comment follows:

In my opinion, the most likely outcome will be a very messy process over the next couple of weeks to establish support for Greece, and by extension the PIIGS, to buy time for a more orderly default or devaluation of Greek debt. Of course, there is always the possibility of a policy mistake that leads to an economic contagion in the European region and a substantial decline in the Euro; however I think this will be avoided by putting lipstick on the PIIGS.

It turns out the messy process repeated itself a few more times and destabilized global investment markets on a massive scale to boot. Given the announcement on Thursday of last week by the heads of the European Community that private bond holders can volunteer (or were more truthfully voluntold) to take a 50% principle reduction on their Greek bond holdings is the problem finally resolved for good? Absolutely not!

The core problem is that the Northern members of the community are much more economically competitive than the Southern members in general. This has been the case for centuries. Germany is a type A+ personality and Greece is a type B+. Germany makes finely engineered and manufactured machinery sought after the world over and Greece makes fine food, drink and romance. Germany is one of the most fiscally responsible countries in the world and Greece, well clearly, not so much.

Historically these imbalances were rectified by currency adjustments which did not lead to defaults or a potential global credit crisis. The Deutschmark appreciated making “The Ultimate Driving Machine” more expensive to purchase for some and the Drachma depreciated making Grecian vacations more affordable to many. It all balanced out.

Not so any more. For all the Euro members there is no adjustment factor and so imbalances persist and are then poorly addressed by central planners. That kind of sounds like how the USSR operated and look how well that turned out.

Lest you think I am being a smug American, our economy has been heading down the same central planning path with healthcare, social security, stimulus spending and monetary policy for quite some time now. But at least we still have a semi-free floating currency that leads to automatic adjustments and precludes defaults. We only have to suffer inflation and a reduced standard of living as punishment for our elected leader’s profligate ways. Maybe we should stop re-electing those spendthrifts.

As for the Euro adventure, stay tuned for the sequel.

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