Greece is obviously the big topic this week so I have what I hope will be a few last thoughts on this issue. Now, I don’t want to downplay the seriousness of this whole situation, but that’s precisely what I am going to do on several matters. Sorry, but not sorry.
1. The Greek economy is undergoing a tragic depression and the core of Europe doesn’t seem to care much. This is one thing we shouldn’t downplay. How we got here is a whole other topic though. It’s common for liberals to view the Greek depression as a result of a public response (austerity, lack of currency sovereignty, etc). Conservatives, on the other hand, say that Greece just isn’t competitive and basically needs to pull itself up by its bootstraps, reduce its debt and be more responsible. There’s probably a bit of truth in both positions, but there’s also some hyperbole in both.
We should be very clear that borrowers and lenders don’t get into trouble by no choice of their own. So, many banks made bad loans (ie, Germany, you screwed up) and many borrowers overextended themselves here (ie, Greece you screwed up). Of course, the problem with the Euro is that highly indebted current account deficit countries are a virtual guarantee as a function of the common currency. And this is where the core’s lack of sympathy is frustrating. They want all the benefits of being the current account surplus countries in a common currency region without having to ever support the current account deficit countries who will, by definition, need some form of redistribution or internal deflationary and depressionary rebalancing as is going on with Greece.
One can argue that Greece was naive to get into such a currency union without a specific mechanism for rebalancing, but what we’re seeing now from the politicians in the core, given Greece’s 7 year depression, is looking unsympathetic at a best and downright cruel at worst. But make no mistake – Greece is not being treated like a “hostile occupied state” as this Telegraph article claims. They chose to get involved in this currency union and as far as I’ve seen they’ve failed to understand its inherently flawed rebalancing mechanism as badly as the core countries have.
Of course, when you understand the internal rebalancing problem within the common currency system you can’t help but feel bad for Greece. And that’s what makes Germany’s recent actions so frustrating. There will always be “Greece” in the common currency. For instance, if you kick Greece out then someone else will become the heavily indebted current account deficit country on the other side of Germany’s current account surplus. They won’t be able to devalue their currency so they’ll borrow to make up the difference between the lost income outflows and domestic demand. And that will go on until it can’t and Germany will throw a hissy fit at that country and kick them out. Rinse wash repeat until Germany kicks everyone out and returns to the Deutschemark which will trade at a huge premium to the rest of Europe and they’ll likely see a huge reversal in many of the last decade’s positive economic trends…..This is truly a case of Germany wanting to have its cake and eat it too.
2. The Euro is not a failed currency. There’s been a good deal of hyperbole from both sides how the Greek debt crisis is a sign that the Euro has failed. Paul Krugman has been particularly vocal. He’s called the Euro a “disaster” and says that it looks like a “terrible idea”. That sounds a bit extreme to me. The difficulties of one member who represents 2% of Eurozone GDP is hardly a failure. I mean, let’s keep things in perspective here. We’re talking about a 24 year old currency union that has been cobbled together over a brief period of time time combining dozens of countries with thousands of years of political angst against one another. If anything, the Euro looks like a great success. It took the USA about 100 years, 10 depressions and a Civil War to get it to a point where our common currency worked well.
Call me a hopeless optimist, but I still have a good deal of hope for the Euro. On that note, Barry Eichengreen had a tremendously good piece yesterday in which he said that Europe deserves a better deal. I think it’s unfortunate that the negative views have dominated the headlines during this period. This is probably due, in part, to the fact that negative headlines are a lot catchier than positive headlines. But it’s also mostly due to politics. This whole debate is really coming down to a blame game and a liberal versus conservative battle over whose economic ideas are superior. The lack of middle ground in these discussions is alarming to say the least.
Still, the point should not be overlooked. The Euro is not a failure and will not be a failure even if Greece eventually leaves. In the right context, it is one of the great political and monetary successes that the world has seen. It would be a real shame for it to fail now given how far it has come. A true currency union is in sight. We shouldn’t let some near-term difficulties ruin what has been a great deal of long-term progress.
3. How about those markets? I said a few weeks ago that the markets would likely look past all of this and have a good laugh at this ordeal when all was said and done. In fact, the S&P 500 appears to have been laughing all along. Reading the news headlines one might have thought that the global economy was melting down. Meanwhile, the S&P 500 has barely budged. Despite their efforts, it looks like the media has failed to scare us all into believing that this is the big one.
It will be nice to get back to some semblance of normalcy in the coming weeks. The cloud of uncertainty that has been hanging over the markets with this Greek “crisis” should be an overall positive for sentiment and clarity going forward. I am excited to focus on normal macro data in the coming months and not this hyperbolic politically made mess. Hopefully this is the last thing I have to write about Greece for a long time….