By Alex Salomon
So many articles are being written about the impending exit of Greece from the Euro and maybe parts of the European Union, it is becoming very difficult to write something new and fresh about the topic. Furthermore, consider all the articles written about the impending survival plans to keep Greece in the Euro and the Union, and it becomes almost downright impossible to add anything new and fresh about the topic!! The only thing that is somewhat agreeable is to call this process “Grexit.” And that it is one ugly name!
The truth is, at this stage, it is too early to predict the “Grexit” outcome. The most commonly accepted view is that, eventually, Greece will be forced to leave the Euro and maybe parts of the EU (freedoms of capital, maybe goods and labor could be in jeopardy) and thus, Greece will have to return to the Drachma and to re-invent itself. It is worth noting that this probable option tends to be the view of financial analysts and economists. The (geo)political experts still hold firm of the opinion that the ECB will finally print a massive amount of money, create bonds, redefine growth and save Greece from leaving the Euro. It is worth remembering that Greece should not have been allowed to adopt the Euro — the government admitted that it lied and continued to cover up deficit numbers — but that they were an integral part of the European Union. And with that in mind, it is conceivable that they will be kicked out of the Euro since they “lied on their resume” (without being the CEO of a large internet company). However, they very well could remain members of the European Union.
So, there we are… the topic is Grexit and it is a pure style Greek dilemma: it is very difficult to add anything new, and the issue at hand is purely speculative!!
If you are as confused as I am by the flow of information and potential outcomes, please follow me down the road of the many different scenarios that could unfold themselves in the future.
1) Major hope returns… As unseemly as it sounds, let’s just imagine that Greece manages to form a new government, which in turn, manages to finally collect taxes from sheltered companies and from the Clergy and Orthodox Church while curbing the black and gray markets, stopping most cash transactions and finally collecting due revenues, while promoting new labor laws effectively promoting growth in Greece. We can dream, others have managed turnarounds before (Chile, anyone? Peru? China, even!!) so why not dream, right? All the while, Greece is buying time, which releases the pressure on the Eurozone and thereby promoting growth in the EU. That would alleviate pressure on most stock exchanges — and create a healthy (and wealthy) natural QE mechanism. Trillions would be re-created in stock capitalization and a natural growth cycle would create a bullish environment, potentially erasing debt loads and re-creating a more balanced environment.
I know this solution sounds crazy and almost like a “self-fulfilling prophecy” dream, but it is all too often being discarded. Many different countries have managed to re-invent themselves from ruins and ashes, so why not Greece? What if they were finally owning up to their national destiny (built on 2500 year old pride) and embraced a different future, a healthy future. Maybe the new Greece will finally be meeting his ethos, rather than its pathos?
Many countries came back from ashes… Granted, the perception can easily be than Argentinians and Greeks are equally proud, equally persuaded of their moral high ground, equally certain of the value of what they brought to their respective region — and yet, equally feeding corruption, populism, political cronyism (and countless bloody dictatorships).
But… maybe this time, this time finally, Greece will rise to a higher standard?
2) Minor hope returns… This scenario is also becoming known as “buying some time and kicking the can down the road.” In a joint effort to postpone the unavoidable car crash and to make sure President Obama tries to avoid yet another roadblock to a difficult re-election campaign, both the EU and the US governments press hard to create a new growth policy. It’s helpful that both agendas coincide (well, add China’s desire to have a soft-landing and it’s almost everyone’s agenda).
The rhetoric is already well-known, it involves a weird mix of US policies (QE; massive printing by the ECB; LTROs, etc.) and EU touches: a mix of semi-growth, including construction spending, infrastructure, and industrial initiatives and semi-austerity, including the “Golden Rules” for most-EU countries — a “Golden Rule” is the choice expression for a constitutional mandate to have only balanced budget voted into laws, year after year.
To succeed (and turn into Major Hope), this plan hinges at least on Greece getting enough time to find its ethics, to clean up its messy ways, to vote for fair and modern labor laws, to curb tax evasion and improve tax collection, and all the while adopt a “Golden Rule” of spending only what it collects, or less.
Another road to success is for Germany to assess the risks to losing its de facto Euro-protectorate and thus to decide it is worth subsidizing the region. Germany could commit to the rational economic decision of financing poorer countries (again, in exchange for real changes in social, labor and fiscal laws) and literally accept such subsidies in the form of Euro-bunds (a true subsidy from Germany to other economies, as the German’s borrowing rate to fund Euro-bunds would likely be higher than its ongoing national rate) or even more brutally in direct loans (probably at long-term losses mitigating with potential dividends and repayments) into building real industries, branches, economies in Greece and maybe even Portugal.
While scoffing at this very concept is easy — because, again, it pertains to the realm of dreams — this solution is not vastly different from the path chosen by the USA to help Mexico and integrate NAFTA. The analogy can lead to many thorough critics, but the reality remains, that, in a way, the USA decided to help Mexico create industries, services, new companies, firmer labor laws and quality standards, to help Mexico help itself — thereby helping the USA.
3) Feeding on others’ hope… There is a less-traveled road to hope for the European Union and it hinges on every other major economic force pulling its weight, doing the work for the EU, while the EU spends even more time debating about fiscal integration, unified budget policies and eventually, a healthy way out of its crisis — or into even more oblivion.
This option is rarely discussed (probably for good reasons, including the fact that it is an unlikely option) but it is akin to the 2008-2010 massive efforts made by the USA and China to avert a global meltdown.
In effect, there is room for a potential global bounce in economies; China is working very hard on avoiding … a hard landing, and President Obama knows that he needs all the good news he can get to retain the White House. So let’s imagine that the next 3-6 months see a large amount of various plain and disguised QE initiatives from several other economies (China, USA, Brazil, Russia, India, Japan); all of them trying hard to bounce their GDPs, plus a lot of “growth” rhetoric coming from Europe.
Now, in fairly typical recent European fashion, nothing is actually being accomplished there, but every other region’s hope helps feed the EU some global growth and time. That scenario could actually buy global growth and Europe some time to re-assess what to do with Greece.
This option is rarely discussed, yet, realistically, it has been the current option chosen since 2008: lever every other major economic region and buy more time for European indecision. What’s changed? Europe knows it needs to either go down the road of fiscal and federal integration, or to reinvent itself without poorer, slower countries.
After that, it’s either back to minor/major hope… or Argentization of Greece!
4) Doomed Devaluation arrives... If we cannot dream and hope because all that Greek national pride is squandered again, corruption still wins, and politics as usual reigns (the same politics that saw three generations of Papandreous lead the country from default to default… mixed with intermittent coups and bloody dictatorships) then indeed, the devaluation scenario will unravel. This is the first path to “Grexit” and yet, something fresh, something important, maybe the most important piece of information overlooked about a potential “Grexit” and ensuing devaluation and return to the Drachma: off the cuff, with a broad stroke, there are probably 1.5 to 3 billion human beings alive on Earth right now that have been through a massive devaluation — and they survived, they loved, they laughed, they cried, they married, they had families and they created wealth and survived — sometimes, long enough to be hit by another devaluation.
Let’s call this scenario the “dream nightmare”: we are still dreaming, still optimistic, still thinking that Greeks will have to live the drama of the Drachma, but it will not be a tragedy.
In that event, again, Greece will “survive” — just like Argentina in 2000, Mexico in 1996, France in 1962, arguably the USA after abandoning the Gold Standard, just like Russia, China, and many other countries, just like countless other economies. Greece will be poorer, will be affected, will be humbled but will be able to bounce back with a competitive (devaluated) tourism industry.
The scary part of that “soft nightmare” is that gray & black markets will thrive, tax collections will not improve, and thus, the onus on Greek leaders to change their ways will be likely too big to NOT fail. Greece will revert to being a poor country as throughout the ages. Its pride will be mostly measured by a return to usual cliches such as “we might be poor in currency but we are rich in history”. That would be nice and not laughable if large shipping conglomerates and the Church were not the proof that “they are rich in currency, rich in history, happy to live off a starved and broken population fed with usual cheap cliches”.
Regardless, in that controlled version of the nightmare, Greece will be an enjoyable touristic destination and again, Greeks will survive, love, laugh, cry, marry … cheat on taxes, vote for the same families of politicians and puddle along.
In fairness, for the rest of the world this scenario will be all right as well. We will likely see a massive drop in equities, stock markets, spike in panic levels, maybe a “krach” — but we too will survive. And when the dust settles on the anxiogenic industry of mass media, we will realize that we too shall live, laugh, survive, dream again. A “soft nightmare” would unfairly pinch us in our checkbooks and ways of life — but for a short while, and in the grand scheme of things, it would be a drop of water compared to all the tragedies we went through in the 20th Century. A Greek devaluation might taste like ’73 or ’87 or even the ’97 LTCM — but these events are the very proof that we managed through.
It would be unfair and bitter if a small country and small economy would affect our wealth — but we would collectively bounce off, because it is a small country and small economy.
5) Back to the Pericles Age… Just like there is a best-case scenario and it involves major hope, there is a worst-case scenario and I am personally worried that it is getting very little professional coverage. Whether I search news (mostly doing a broad search via Google News) or whether I search on Twitter and other modern news outlets, I cannot find a lot of coverage about what would happen if Greece was to become poor (or ultra-poor) and yet, still in a free market world.
While I want to believe in HOPE, I am also deeply concerned about the consequences of Greek ultra-poverty on its relationships with Turkey, Albania, Serbia, Bulgaria and other surrounding economies; about the consequences on internal politics and the obvious rise of Stalinist and Neo-Nazi parties; on the consequences over Cyprus and deeply rooted issues and past feelings in the region.
I desperately want and hope this last scenario is nothing more than material for Tom Clancy, but my fear cycle would read like this:
- Greek devaluation and riots and poverty leads to many acts of violence from minorities and against them, too…
- In typical fashion and time-tested response, populism creeps higher and higher until either stalinists or neo-nazis gather enough votes to disrupt coalition
- In the meantime, all the while, Turkey and surrounding countries legally, rightfully buy the best assets from Greece, its tourism, some infrastructure, etc.
- In a populist response and a need to cement the National Pride of Greece, the government unilaterally seize and nationalize foreign (Turkish…) assets… (refer to recent Repsol incident between Argentina and Spain for a text book illustration of that crisis… please do note that a large majority of Argentinians believe this unilateral nationalization and repossession was justified… Populist propaganda is blind and at times basic… but so powerful).
- In a show of power and measured response, Turkey seizes what’s rightfully (in its mind) the rest of its Cyprus property (or blockades the main port in Athens, the Pireas port… or possibly even the military port in Athens, Elefsina).
- In a show of power and measured response, Greece sinks a blockading ship or whatever Tom Clancy can muster…
Of course, this would NEVER happen. We never had wars started in the Balkans or Greece. We never had military disasters involving Turkey and Greece.
And even if we did, we learned so much from the past, that this time, it would be different.
Lastly, we learned so much from the past: Greece cheated on its numbers to get into Europe, does not collect proper taxes, and most of its politicians do not rely solely on a nationalistic and proud message to carry elections (insert sarcasm). We learned so much that I really hope only MAJOR HOPE is the solution for “Grexit.”
(Full disclosure, I lived in Mexico in 1996-1997 during the Peso devaluation and then again in Argentina in 2000-2001 during the Argentina crisis… people did survive, love, laugh, cry, marry … cheat on taxes, invoke national pride and have not really changed their ways … but they survived).
Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.
No position in any of the securities mentioned at the time of publication.