The votes are in and it is a firm “No” to future austerity. More than 60% of the Greek populace want it to end. Is the sky falling? Did Greece suddenly exit into a black hole of debt on the Acropolis? Let me take a look – No to both questions. Armageddon did not take place. We are safe for another day, but the pundits are having a field day predicting what will come next, while wiping the slate clean of their direst among dire previous predictions that did not come to pass. As always, there is no accountability when it comes to the press.
This is not to say that nothing happened. Although the “No” vote was greatly anticipated and already factored in, according to most so-called experts, financial markets have been active in certain sectors. The Euro “gapped” down on the open by 1.2%, but quickly re-filled the gap in time, hovering now at 1.105. Stock losses in a word have been limited. As for bonds, capital flows have predictably left securities issued by Spain, Italy, Portugal, and Greece for more secure ground in Germany and the United States. The panicked rush for the exits by all global investors, however, did not occur.
Many investors and economists are holding their collective breaths at the moment. Their opinion is that we are witnessing the calm before the storm. The all-important creditors are not the public at large. They are primarily the EU, the ECB, the IMF, and a sprinkling of other banks and financial institutions. These public entities are never ones to pull the trigger too rapidly. They tend to wait for guidance from the central banking community, which could ruminate over what to do next for days, weeks, and months. The European Debt Crisis has been with us since 2010, so why not add years to that last sentence?
What are the immediate consequences of the negative Greek vote?
Prime Minister Tsipras and his ragtag Syriza Party actually campaigned for a “No” vote, so it is not that surprising that his loyal followers obeyed their commander-in-chief. The market response, as stated above, has been muted, but watch for the fade in afternoon trading, as more articles begin to appear in the press. EU chieftains will have to move swiftly to regain the advantage. Angela Merkel of Germany and President Francois Hollande of France are meeting today to discuss next steps and, hopefully, to draft some kind of response. Even corporate executives may speak out. It is earnings season.
The major concern for the powers that be is that contagion will spread to other countries on the periphery. European officials will need to move swiftly to shore up sovereign debt liquidity for the likes of Spain, Italy, and Portugal. Translation: The ECB will have to buy more securities on the open market, expand its balance sheet, and thereby weaken the Euro. Economic Stability funds will swell, as well, while all the parties involved will go into “blame game” mode, each pointing fingers at the other as the guilty party. Like it or not, the drama will have to progress to a “Plan B” game plan, but, unfortunately, we doubt if either side has gone that far in their analysis or planning.
Another consequence is far more foreboding for Europe. It seems that every leftist and anti-austerity political party has suddenly become emboldened. Spain’s leftist Pablo Iglesias quickly congratulated Tsipras on his successful maneuvering about the negotiating dance floor, while Nigel Farage, Britain’s Independence Party leader, publicly complimented Greek voters for moving with courage and conviction. French far rightist Marine Le Pen initiated the inevitable blame game by accusing the European Union of oligarchic behavior of the highest order where a few individuals control the government for their own corrupt and selfish purposes. It is only Monday, and the barbs are already being thrown with reckless abandon. This fight could get interesting.
The saddest consequences, however, will be inflicted upon the Greek people at large. No matter what happens, things will get worse before they get better. Tsipras may even keep the banks closed for another week. In the meantime, long lines are waiting at ATMs to make much-needed cash withdrawals, but where will he cash come from? If the government has to issue some kind of IOU, then this form of script may become the alternate currency that many have predicted. Hoarding will follow. Inflation will take hold, and a barter system may be the only viable method for exchanging goods and services.
Has Greece really tried to do what other say they have not?
Arguments can actually be made on both sides of this issue, but as public debates heated up, each side has accused the other of lying and twisting the facts to suit their wishes. If we look at the long view, that being since the creation of the EU in 2000, then we can see that not all is so bad about the Greek economy, at least not as bad as has been constantly portrayed in the press. The following graphic is quite revealing:
As with the rest of Europe, things were going along fairly well, up and until the recession hit in 2008 and the debt crisis appeared in full bloom a few years afterwards. As one analyst reported for this period of growth, “Greece's economy grew by 77%, with both government spending and household consumption expanding by 39%. On top of that, the labor market grew by 14%. This rapid pace of growth was fueled by easy credit, made possible by euro area synergies, and a strengthening global economy. When the bubble burst in 2008, however, Greece's economy shrank to levels not seen since the turn of the millennium, or in some cases, even further back. The economy contracted by 25%, with both government and consumer expenditures drastically declining.”
As with many of the southern periphery member states in the EU, there is not a large manufacturing base, as in Germany and other contiguous countries. The southern states depend much more on tourism and agriculture, both heavily influenced by the value of the Euro. Today’s Euro is easily 30 to 40% higher in value than the Drachma, if it had remained, would have been. Therein lies the primary issue – northern states benefit with greater export activity, while southern states must carry the burden of a stronger currency in the form of weaker export trade and lowered tourist traffic, a tariff of sorts imposed by the stronger member states of the EU, never to flow south, as it should.
With an economy that is contracting 25% and with debt repayment agreements, negotiated in 2012, demanding that surpluses be accumulated at a 4% annual rate in Greece, the result is that Greece could never perform on its present bailout deal, much less some revised version of it with more austerity. These performance targets are also greater than any other country in the EU has achieved in the past five years, meaning that the original deal was doomed form its outset.
To make matters worse, Greeks, who can find jobs, are having to work two of them at low wage levels, just to make ends meet. Without investment or government stimulus, there can be no growth, especially GDP growth in excess of the average by 4%. As a result, the rate of unemployment in Greece is roughly 20%. Youth unemployment stands at 50%. The good news is that both of these figures have come down since 2013, when much higher levels were recorded. Greece is not a land of lazy slackers, as Germans would have you believe. They work more hours and for less pay than their German counterparts, at least those that can find work. The issues are ones of growth and jobs, not finger pointing.
Concluding Remarks
As Reuters reported today, “In Athens, thousands of jubilant Greeks waving flags and bursting fire crackers poured into the city's central square as official figures showed 61 percent of Greeks had rejected a deal that would have imposed more austerity measures on an already ravaged economy. For millions of Greeks the outcome was an angry message to creditors that Greece can no longer accept repeated rounds of austerity that, in five years, had left one in four without a job and shrank the economy by a quarter.” Greek citizens have spoken. Did the rest of Europe hear them?
Wolfgang Schaeuble, the German finance minister, insists that borrowed money must be paid back. His Greek counterpart, Yanis Varoufakis, who resigned today under duress, has protested against “seemingly unending depression, unemployment and misery.” The IMF also released a report that actually acknowledges the Greek argument, claiming the 2012 terms were unreasonable, tantamount to stating that all existing debt must be devalued again. While the EU tends to a bloody nose, the panting Greeks have withdrawn to a neutral corner.
The fact of the matter is that as GDP falls, it only makes the debt burden loom larger over time, a phenomenon that economists label as “debt deflation”. A similar situation hit southern Asian states back in the nineties after a period of solid economic growth. It would not be the first time that strong industrial states in the north have exerted their power over their southern, less fortunate, economic rivals. Tariffs, in any form, tend to enslave one group, while the other reaps the benefits that they are loath to share. At some point, something has got to give. A dual-EuroZone may have to be the answer.
Will Greece exit the EuroZone? What will become of the Euro? Expect the rhetoric to rise to another plateau. A Grexit could happen soon, or maybe not. These are uncertain times, and the only “given” in times like these is that uncertainty leads to volatility in our financial markets. If EU bailout securities come flying off the printing press, then expect the Euro to falter. A Grexit, however, would, believe it or not, bolster the Euro, unless it was also accompanied by contagion in the periphery. It’s time to flip a coin or let the market decide. After all, that is what markets do.
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by Tom Cleveland