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    Greece, Germany, and the Europeans: A Contrarian View

     

     

    g g emu may 20


    The conventional view of the acrimonious debate over Greece’s European bailout was expressed in a Wall Street Journal article by Matthew Karnitschnig on February19th, "Those resentments aside, Greece needs Germany more than Germany needs Greece. Today, Greece depends not only on German bailout money but also on its tourists. Germans comprise the largest group of visitors to Greece and tourism is by far the country’s largest sector.”

    I am not picking on Mr. Karnitschnig and the Journal; this is the standard view in almost all commentary on the dispute. 

    In the three months since little has changed except the Greeks are that much closer to running out of cash.

    The idea that Greece needs German tourists is true. Greece needs as many tourists as possible.  But the notion that Germans will stop coming if Greece leaves the euro is silly.  They will come in far greater numbers to take advantage of their enhanced purchasing power against the new drachma.

    If Athens departs the European Monetary Union (EMU) and reinvents its currency, a devaluation of the drachma is guaranteed. No matter where the initial euro exchange rate is set the drachma will fall.   Tourists will flock to Greece from the euro zone, the United States, Great Britain and the rest of the world. The fascination of classical Greek civilization has never dimmed. When better to experience it then when it is on a 50 percent currency sale?

    There is a similar misapprehension over the idea that Greece needs Germany more than Germany needs Greece.

    On the surface Greek leverage is nil. But dig a little deeper and view the conflict not in strictly financial terms and Greece’s position and leverage vis-a-vis Germany and the Europeans improves enormously. The only catch is that Athens must threaten Armageddon; and be believed.

    Greece is broke and has been for five years. Only Europe and its institutions can provide the cash Greece needs to remain solvent. Only Germany, the source of the lion’s share of the funds, can give permission for loan access, or whatever is the agreed formula is called, to commence. Without German and European funds, Greece defaults on its debt. Whether it can continue to pay its pensions, electrical bills and vendors, is highly problematical. The nation, it is assumed, will grind to a halt. 

    If you take only the Greek financial situation into account their negotiating position seems hopeless.  Sometime after the end of May in the current estimation Greece will run out of euros.  What then?

    Even before that the Greek banking system could fail. If the ECB cuts access to its ELA program which is supplying liquidity to Greek banks as deposits flee to euro denominated accounts elsewhere, Greece would have to institute capital controls or watch its banks disappear.

    But Greek negotiating leverage, in spite of the dire situation, or perhaps because of it, is not nil. In fact it is far stronger than commonly appreciated.

    It is understandable why reasonable, logical, and normal analysts think Greece has run out of choices and must accept whatever Europe and Germany dictates. How else to avoid the chaos that they assume must follow a Greek exit from the euro? But would the chaos be restricted to the Peloponnesus? And will the supposed chaos appear so to the Greeks?

    No one knows what the actual result of a Greek exit from the euro would be. Politicians and economists may express confidence but that is for public consumption.

    The EU Commission maintains a default could be handled by the European banking system and would not spread financial and political disorder across the continent.  But they cannot know that with any certainty, no matter what they say. The world financial system and the world and European economy is weak. Do they really want to find out how parlous and unstable it may be?

    The take away from today’s FOMC minutes was the evident wariness of the Fed governors over a rate hike.  

    If the U.S. central bank, with 3.0 percent annualized GDP growth over the past year, is reluctant to begin to normalize rate policy with a minute 0.25 percent increase, what economic strength are the European quoting to justify their confidence in the face of the enormous shock of a Greek default and exit from the EMU?

    If the Europeans listen carefully they will hear what Timothy Geithner, an American Secretary of the Treasury during the financial crisis, said recently in reference to  the bankruptcy of Lehman brothers, ‘If we knew then what we know now we would not have let it happen’.  

    How could the bankruptcy of Greece, a member of the largest economic bloc on the planet, and its first multi-national currency be any different?

    It is true that historical polling has shown that Greeks, by a wide margin, want to stay in the euro. It is also true that Syriza’s hard line against it creditors is popular, though slipping. 

    If Alexis Tsipras and Yannis Varoufakis are willing to threaten the unreasonable will the Europeans bend to preserve their union?

    The Greeks have two powerful aids, one external and one internal. First if Greece flees or is forced from the euro the goal of 60 years of European policy evaporates with it.

     As Mr. Karnitschnig puts it, "Even more daunting a Greek exit would prove that the eurozone isn’t inviolable and trigger speculation over the future of other weak links in the currency bloc, such as Portugal, Ireland and even Spain. The euro crisis could return in full force." 

    The inevitability of European unification would be shattered. Brussels would rapidly morph from a federal style centralized bureaucracy dictating and ordering its member countries with regulation to a cockpit for the time honored competition for spoils and influences of its individual members--a balance of economic power system rather than a collegial bureaucracy.

    Nationalism, which the Europeans have tried so desperately to subsume in the European community, will rear its ugly head, first on the debt and bailout and soon on every other issue that Brussels adjudicate. 

    Germany has its own specific reasons for keeping the EMU in economic health. Its export dominated economy sends 50 percent of its goods to fellow Europeans. 

    The second negotiating strength of the Greek government, though perhaps unnoticed in the north, is the resilience of the Greeks themselves. The Greek population, despite six years of recession and five of crippling national austerity has not noticeably cringed. Given the choice the voters elected the strongest opposition to its European partners possible.  

    The Greeks’ anti-authoritarian, anti-government style could be more than helpful if the economy is plunged into default and a euro exit.

    The black market in Greece was estimated in 2012 to be 24.3 percent of GDP.  More than twice as many Greeks are self-employed, 31.9 percent as the 15 percent EU average. Greek tax evasions may   leave 30 billion euro a year or more uncollected.

    Greeks have already pulled back sending taxes to the government. Receipts have dropped noticeably, with Athens reporting a nearly 1 billion euros ($1.14 billion) shortfall in January--20 percent below official projections. Revenues missed by 14 percent in December after having been mostly on target in the prior eleven months.  What else are its citizens doing but preparing for worse times ahead?

    Greeks have been coping for five years with a shrinking, moribund and cash strapped economy. It is not flippant to say that the adaptions and evolutions needed to maintain life since 2010 will serve if needed in a euro exit.

    Greece is not in fact broke, in the sense that it has no revenue.  The government projected a primary surplus, before interest payments, of 1.5 percent of GDP in 2014 and 3.0 percent in 2015.  Though with revenues running far below estimates and the economy having contracted 0.2 percent in the fourth quarter, the government’s estimates seem improbably optimistic.  A Greece in default would be without access to borrowing, it would have to choose who and what to pay, but it would not be without funds.

    If Greece remains within the EMU then the ramifications of the crisis will likely remain within the monetary union. Markets will continue to view the dispute as a squabble within the union, that, if not expeditiously handled--when have they ever been--came to the normal denouement. The EU and Germany ponied up and the debt can was kicked farther down the road.  

    If however, Greece leaves the union the ramifications will immediately become the topic de jour in the credit and currency markets.

    The Germans may welcome a euro at par and the minuscule level of their interest rates, but little else of the ensuing crisis will be to their liking.  If there is one thing learned in the 2008 crisis it is the viral nature of the modern interconnected world financial system.  Europe's crisis will soon become the world's. 

    In the convention view Tsipras and Varoufakis no choice but to kowtow to European and German demands and sign whatever deal is proffered. 

    But Greece has the power to unmake the European world. Will the Germans and Europe’s political leaders really let that happen?

    Joseph Trevisani                                                                                 

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Forex Trading Demo
     

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