What If? . . . and When? . . . and Then What?

[Guest fountainhall]

Flipping through various TV channels last night, three questions seemed to be on every pundits' lips. The first was no longer, “What if Greece abandons the Euro?” but “When?” The second: “How will that affect Eurozone?” The third: “What Will be the Effect on the World Currency system?”

 

Since the austerity plan worked out with the EU has as little chance of getting the country back on its feet as Achilles famed immunity to death in battle, ditching the Euro in favour of a return to the drachma seems the solution many now favour. That, however, takes the world right into uncharted waters. The next weeks will be crucial, as analysts at Merryl Lynch said on CNN last night.

 

If Greece does return to the drachma, others predict that the weak dominos in Europe will also fall – countries like Ireland, Spain, Portugal and Italy, with France not far behind.

 

Investors are likely to flee the debt of the other weaker economies struggling with their own sovereign debt issues. Yields could soar on government debt for Portugal and Ireland, let alone much larger economies like Spain and Italy, vastly increasing the costs for the remaining European governments that are paying for various bailouts.

 

Some economists think that the outlook for a new drachma financed Greece might lead to a sense of short-term euphoria.

 

There are €35bn (£28bn) of banknotes in Greece, mostly under mattresses. If they could be mobilised, a lot of problems would be made easier.

 

Some suggest a Greek exit might actually strengthen the rest of the Eurozone. Others, though, predict a mini-Armageddon that is not going to leave the US and Asia untouched.

 

How bad could things get? . . . "I don't think anyone at the present time can quantify the contagion effect of a disorderly exit of Greece from the eurozone," said (Dimitri Papadimitriou, economics professor and expert on Greece from Bard College). "No one can predict the markets. They have a mind of their own.

 

In a worst-case scenario, the Greek exit prompts other countries to leave the euro, as voters there follow Greek voters' lead and rebel against austerity measures.

 

"As it stands now, there's no precedence for leaving," said Afseth. "If Greece leaves, all of sudden there is precedent."

 

If larger countries follow Greece out of eurozone, it could cause a meltdown in the European banking sector, which holds billions of euros of sovereign debt of the other troubled economies, as well as private sector loans to consumers.

 

In turn, businesses in those countries would be unable to pay given their suddenly devalued currency.

 

While U.S. authorities have said U.S. banks have relatively limited exposure to European sovereign debt, the major banks here do have exposure to the European banking system, so a meltdown in European markets would be felt in the United States and around the globe.

 

Why a Europe that has frittered away its funds on reducing working weeks and pension ages and increasing all sorts of entitlements, should be allowed to get away without a few years of suffering beats me. Asia went through as bad a crisis in 1997 - 2001 and came out far stronger as a result. But the corrupt politicians and the cossetted populace will no doubt get their way. Austerity is not for them. Bail-outs will be delivered, money printed and inflation will gnaw away at the wealth of individuals.

 

And what should those of us here in Asia whose retirement funds have never recovered from the burst of the dot.com bubble, the worldwide effect of SARS and the 2008 financial meltdown now do with our money? I’ll no doubt lose yet more and have to postpone retirement even further.

 

But perhaps a new option awaits us, though; a little silver lining amidst the gloom. I wouldn’t mind crashing out for a year or two on a gorgeous Greek Island - Mamma-Mia like - paid for in much devalued drachmas!

 

Quotes from -

http://money.cnn.com...n=yes&hpt=hp_t1

http://www.guardian....ncy-expert-view

[ChristianPFC]

I just read last week's "Der Spiegel" (most popular German weekly magazine), and they don't ask if Greece has to leave the Euro zone, neithern when they have to leave the Euro zone, they have an article why Greece will have to leave the Euro zone!

 

http://www.spiegel.d...ex-2012-20.html

[Bob]

Sometimes I think that the views of the talking heads on the news programs change more often than the weather. When you've got to fill 24 hours of "news", it's amazing at times who'll they'll dredge up to offer some unknown or bizarre views. And, of course, we have the Ron Pauls here in the US that are demanding we go back to the gold standard.

 

Although I don't know all that much about it, I never understood how multiple countries can effectively share a common currency when their economic systems and planning mechanisms are all different; besides, many nations simply instinctively view their currency as inherently connected with their individual brand of nationalism. Unless and until the various countries combine into a single poltiical and economic union, I personally can't see how it will work very well on a long-term basis.

 

On a very long-term basis, it seems to me that "cash" is on it's way out and we'll be relegated sometime in the future to some type of debit and/or credit card. With the ability of international banks to electronically connect to each other and their computers having the ability to virtually and instantly switch between currencies, I really don't see (long-term) the need for any physical international or multiple-country currency.

[Rogie]

I just read last week's "Der Spiegel"

 

Thanks for the link Christian, and the fact it's written in German (natch) saves me having to read it so would I be right in assuming Der Spiegel's opinion reflects that of the majority of German people?

 

And, of course, we have the Ron Pauls here in the US that are demanding we go back to the gold standard.

 

Hang on, wasn't he in the running for the Republican nomination at one time? You sure have some strange people in the US

 

 

Although I don't know all that much about it, I never understood how multiple countries can effectively share a common currency when their economic systems and planning mechanisms are all different; besides, many nations simply instinctively view their currency as inherently connected with their individual brand of nationalism. Unless and until the various countries combine into a single poltiical and economic union, I personally can't see how it will work very well on a long-term basis.

 

Unfortunately, I believe some politicians actually believed in political and economic union in our time, so to speak. The Euro was all part of the Grand Plan. This is very simplistic and a bit jingoistic, but basically France and Germany got together, allied with the Eurocrats (the salaried placemen in the European Union) and steamrollered the whole thing along. Feeble countries like Italy went along with it and of course the weaker countries such as Spain, Portugal, Greece, Ireland (the PIGS) rode the gravy train for all it was worth until the poor old thing ran off the rails. A few countries, such as Britain, declined to join and I think you sum it up pretty well when you say "many nations simply instinctively view their currency as inherently connected with their individual brand of nationalism".

[Guest]

Greece & Italy didn't meet the criteria for entry to the Euro, but they cooked the books & people turned a blind eye......

Then, the Euro should have never been set up in the first place. This is a classic triumph of politics and egos over fundamental economics.

The PIIGS all required different interest rates to Germany, but due to a single currency they were always compelled to have the same interest rate. So Spain, Ireland & Greece went off on borrowing binges, which would normally have been reigned in by increases in interest rates years ago, had they had independent currencies.

So the bubble continued to inflate, then when it went pop, there is no longer any mechanism to restore competitiveness by devaluation within a single currency.

The whole Euro project should be dismantled. It will never work.

[Rogie]

Time for some home truths:

It's payback time: don't expect sympathy – Lagarde to Greeks

 

Take responsibility and stop trying to avoid taxes, International Monetary Fund chief tells Athens

 

The International Monetary Fund has ratcheted up the pressure on crisis-hit Greece after its managing director, Christine Lagarde, said she has more sympathy for children deprived of decent schooling in sub-Saharan Africa than for many of those facing poverty in Athens.

 

In an uncompromising interview with the Guardian, Lagarde insists it is payback time for Greece and makes it clear that the IMF has no intention of softening the terms of the country's austerity package.

 

Using some of the bluntest language of the two-and-a-half-year debt crisis, she says Greek parents have to take responsibility if their children are being affected by spending cuts. "Parents have to pay their tax," she says.

 

Greece, which has seen its economy shrink by a fifth since the recession began, has been told to cut wages, pensions and public spending in return for financial help from the IMF, the European Union and the European Central Bank.

 

Asked whether she is able to block out of her mind the mothers unable to get access to midwives or patients unable to obtain life-saving drugs, Lagarde replies: "I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time. Because I think they need even more help than the people in Athens."

 

Lagarde, predicting that the debt crisis has yet to run its course, adds: "Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax." She says she thinks "equally" about Greeks deprived of public services and Greek citizens not paying their tax.

"I think they should also help themselves collectively." Asked how, she replies: "By all paying their tax."

 

Asked if she is essentially saying to the Greeks and others in Europe that they have had a nice time and it is now payback time, she responds: "That's right."

 

http://www.guardian.co.uk/world/2012/may/25/payback-time-lagarde-greeks?newsfeed=true

[Guest fountainhall]

I was taling to a friend the other day who, like me in the first post, complained that Asia had to go through extreme austerity measures in 1997 - 2001, and the US in 2008 - 2011. So why not Europe now?

 

We came to the rather obvious conclusion that whilst Asia 'burned' at the end of the 1990s, the US and to a large extent Europe were booming. They were the engines driving the world economy forward. Even in 2008 - 2010, it was not just stimulus packages but also China's phenomenal growth that kept worldwide collapse at bay.

 

The difference now is that we have lost the engine. The US economy is sputtering to life again, but it is very fragile. Europe is a basket case. China is seeing decades of double digit growth rates tumble down to 8% - with some economists even predicting 6.5% unless there is more QE in that country. And let's not forget: much of China's exports have traditionally found their way into the EEC.

 

So if through austerity measures. Europe's economy does collapse, is the world destined for many years of recession?

 

The EU bureaucracy and the politicians in EU countries had rosy-tinted spectacles on when they reckoned absorption of so many 'sick' countries could only have positives. Their lack of detailed, in-depth vetting of crooks like Greece, like the western governments which broke down fiscal barriers, like the crooked bankers who then used that new freedom to create an almighty 'bust', is in my view a criminal act and heads should not only roll but bodies should end up in jail. They won't, of course. It's the little people who end up paying - as usual.

 

But none of that resolves the stalemate. With all the austerity measures now being put in place, where will the growth come from to drag the world economies back into better times?

[ChristianPFC]

There is some irony in the situation: people in poor countries live in poverty, but are dept-free. We live in wealth, but national dept per person is in the range of ten thousands of Euro / Dollar / Pound. Technically, we are the poor! (Assuming that the average European or US-American would have to sell all his possessions and work hard for years to pay his part of national dept.)

 

Even stranger: I don't feel responsible at all for Germany's national dept. It has nothing to do with me. I never took any credit and my bank balance has always been positive. So count me out of paying Germany's national dept.

[Guest]

National debts are usually (eventually) paid for by increased taxes or by inflation. One always has to take care to avoid losing out on both counts.

 

As for paying the national debt of Germany, I wouldn't worry about that. Germany having to pay for the national debt of all the PIGS should be more of a worry.