By Joseph Giulitto, Trust Company of America
Hesiod wrote a few years ago- A spirit of competition, of “good conflict” that tends to reduce the problems of scarcity. (Hesiod was in favor of the rule of law and the dispensation of justice to provide stability and order within society. He spoke out against corrupt methods of wealth acquisition and denounced robbery.700BC)
A very telling tale with eerie significance to current events.
Greece voted this weekend to continue its stay in the euro despite the opportunity that a withdrawal could have presented. The short term volatility and pain that would have ensued was not palatable to the citizens of Greece. This sentiment to stave off short term pain in lieu of potential long term disaster has become a major strategy play in the life of every human that inhabits this globe. If we have learned anything over the last decade, it is that the creation of a safety net only works to delay the inevitable, as we have seen in the bailouts of the major automobile producers in the US, to the bailouts of sovereign nations. To throw money at them is simply slowing the push from the cliff. At some point they must be allowed to fail.
Withdrawal from the euro could trigger a deep recession. Europe is already struggling with recessionary pressure and this could be the catalyst to guarantee a recession. As Niall Ferguson mentioned last week on Bloomberg TV “that a Lehman moment could be nearing for the euro crisis.”
Jason Manolopoulos, author of Greece’s ‘Odious’ Debt, says the state has become a hydra with seven heads: cronyism, statism, nepotism, clientelism, corruption, closed shops and waste. Kleptocrats have been running the show and their predilection for thieving and bribery has poisoned the nation.
You can blame the Greek citizens for not paying enough taxes but you would need to be as equally critical of Greek government for the level of corruption and spending within its ranks. A democratic society has to be equal parts of participation and balance. Is what we are seeing in Greece a foreshadowing of our own destiny?
We have developed a philosophy over the last 16 years that once an industry or entity becomes too big it simply cannot be allowed to fail. We fear the outcome of failure and will take any action to prevent it. Can too big to fail create a larger more destructive event in the end? What if we allow Greece to take the high road as in fabled mythology and allow our hero to perish for the greater good of mankind?
Allow me to stretch my imagination and explore what could have been had the election in Greece last night gone another direction. Let’s say that the Greeks decided a return to the drachma was the best option for the long term. Let us imagine a world where politics did not sway long term goal planning and empower a government the ability to make a decision that would change a country based on long term goals. The country would form a new currency with a trade ratio to the current euro of 1:1. The newly formed central bank of Greece (CBG) would have to impose a certain level of control over withdrawal rates to provide some level of loft to the new currency to avoid its plummet. The Greek government would need to establish a print process and company to develop. (This way to maintain some level of credibility, allowing Greece to print its own money could prove to be a greater threat).
Borrowing for Greece would soar short term (this could also impact other nations with the same problem). Once it could establish some level of fiscal discipline, borrowing costs would return to a more normal rate. While Greece would experience this short term struggle the safe haven investments would rise. This new influx of money would work to strengthen the nations with the ability to provide funding. Germany, England, China and yes, the US of A would see renewed buoyancy and investment. With that the industrialized world would start to see growth. Real private sector growth.
The true fear for the nation of Greece and maybe for the world to witness, would be the political unrest. We have seen the citizens revolt at the thought of austerity. The potential fallout of this action could be massive. The protests and civil unrest would result in the loss of wealth but more importantly it would certainly result in the loss of lives. This could be the most significant downside to a withdrawal from the euro. Also this may be the single area that no government could control. The people’s reaction to massive economic strife would certainly not be taken in stride.
The re-priced drachma would more than likely fall in value against the more established currencies of Europe and the world. This currency drop would translate into cheaper labor cost and increased exports. Soon Greece would be the benefactor of a possible tourism boom. Exports out of the isles would increase due to cheap costs associated with production and distribution. Greece would see its revival. The rest of the euro zone would be less competitive than Greece. Allowing the private sector a massive opportunity to see growth. If handled well, the return to a sovereign currency could be the strategy for several European nations. Again- assuming it was handled well.
It would not be easy. It would not be without a loss of private, public wealth and potentially the dramatic loss of stability within the nation. The short term losses would be unpalatable and difficult to watch unfold. While I don’t see a return to the French revolutionary response, the withdrawal of Greece from the EU could be the French revolution of our age. As we stand currently, the initial bailouts were offered to the Greeks under the pledge of austerity. In order to get the money you needed to cut your spending. Now the EU has to provide bailout funding to the Greeks without any discussion of further cuts in fear that the Greek contagion will spread. It has become a game of chicken. Unfortunately the game forces us all to play.
Recently Lagarde (IMF Chief) stated, “It would be extremely expensive and not just in Greece, extremely expensive and hard.” It has become apparent that the goal of EU leadership is to keep the euro zone intact by implementing a rescue package. Yes, more stimuli. This approach will be slow and costly. The approach that we just explored will be fast and costly. Do we sip our medicine or chug it down with an inglorious scowl?
We have adopted a philosophy that providing a pain killer is better than providing a remedy. With all that said- maybe it’s just easier to avoid Europe right now.
I recently found a timely interview with Bill Gross that details this very thought.
Enjoy.
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