With all the financial news focused on a looming Greek debt default and the pundit’s myriad forecasts of apocalyptic consequence, it might be easy to forget that Greece is celebrating it’s 6th anniversary of this current debt crisis.In this post, I’d like peel back the layers of hype about the Greece financial crisis, and look at the root of the gridlock problem.
The question on everyone’s mind is, will Greece will exit the European Union? I personally feel that a Greek exit is a highly unlikely scenario, since there are no clear advantages to either the EU or Greece to separate. Let me explain.
For the European Union, a Greek exit would be a political nightmare that opens a floodgate of financial problems. You might think that Greece is relatively inconsequential in terms of its financial contributions to the EU, and that a Greek exit would not have much of an influence on its overall financial welfare. So big deal, let Greece leave, write off the debt and focus on things that matter most!
The challenge for the EU is contagion.
Allowing the Greek domino to tip starts a chain of reactions in Spain, Italy, Portugal, Ireland and other debt laden members of the EU. The fight in Greece is a fight for the European Union itself. While the demands for some level of austerity from Greece seem unfair, it is the only way to keep the EU in tact. IF the EU softens debt terms for Greece, then it has to soften debt terms for other economically strained countries – putting an enormous burden on the already weak economic union. A Greek exit is no better. The EU could probably absorb Greek default, but defaults don’t happen in a vacuum. The financial burden is not removed – it’s just transferred to other parties and you have no idea where the burden will manifest itself. Clearly, the EU is stuck between a rock and a hard spot.
For Greece an exit is equally dire. To exit the EU would mean austerity for the Greek people of the worst kind. Some people are arguing that Greece should exit the EU, wipe their debt clean, and start over printing it’s own currency – the New Greek Drachma. The problem is that if Greece exits, then foreign investment money will be non-existent. This puts the strain of finance on the Greek Central Bank to issue bonds, buy the bonds themselves, and print money to pay the bonds. In short – inflation and taxation. The inflation will destroy pensions and any semblance of wealth for Greek citizens. In other words, a Greek exit will guarantee the austerity they are trying to avoid by renegotiating debt structure. Greece’s argument that the debt demands from the EU are too burdensome for their citizens is a weak argument, because its only other option is worse austerity. Clearly, Greece is stuck between a rock and a hard spot.
So what is most likely to happen next is exactly what has happened for the past six years. Rescue funding may be given at the last moment to allow Greece to limp along for a few more months while political posturing continues to play out for the media. Perhaps Greece will default on a payment – just like it did a couple years ago and just like Cyprus did in 2013. Other political players such as Russia and the US will try to steer the outcome to their favor – possibly offering assistance in one form or another. Meanwhile, you’ll have a group of bankers and lawyers working behind closed doors to restructure and renegotiate terms in hopes that time and inflation, or better yet, real economic growth will sweep all their problems away.