Friday, June 15, 2012

Adios – Acropolis, Countdown to June 17

This article of mine is published in Hindu Business Line on June 16 (Link)

The people of Greece have set themselves for a historic re-election on June 17; the results of which may reshape not just the European but the global political and the economic landscape. If the elections concluded about a month ago are any indications then this one could be a harbinger of the rocky times ahead. Such had been the impact of the elections in May that the financial markets are still rolling over across the Atlantic and the Pacific.
More than two millennia ago it was Greece that gave a voice to it citizens by the power of ballot, that template the world has been following since then. Following these elections the Greek electorate may not just free themselves from the shackles of a disastrous currency union but in the process may also make the citizenry of the world reject any future bailout of the financial institutions with taxpayers money. With all this talk of over 300 billion dollars provided to Greece in form of the bailout money, the fact of the matter is that over the last 2 years Greece has just served as a conduit for bailing out the insolvent European financial institutions (see graph) with just 20% of the bailout money reaching to the Greek masses and the rest being divided amongst the various financial institutions.

With the so called “radical left” Syrzia party of Greece not ready to join any pro-bailout coalition; the party has seen its popularity soar after the first round of polling in May and if it ends up forming the next government after June 17 then all bets are off. Although their leader Alexis Tsipras has rejected the bailout terms as null and void but has publicly stated his intention to keep Greece in the Euro, however anyone with some IQ would know that this position is untenable as a rejection of the bailout agreement would mean a Greek Euro exit. To be clear, leaving the Euro would surely put Greece under the weather for a couple of years with the country facing the prospects of bank runs, capital controls which can be followed by a bout of high inflation possibly even hyperinflation (when drachma is reintroduced) but if it is done in a planned way the damage could be contained somewhat, like pegging the drachma with Euro to start with and then making it to float as time passes. This can be accomplished with assistance from ECB and IMF as remember ECB still holds a substantial amount of Greek debt and so is on the hook. More importantly Greece would have something to look forward to in the future after this brief quagmire. This prospect is certainly far better than a never ending depression that has already carried for 5 years now!!!
The reason why no currency union without a fiscal union has ever worked in the history is because it is economically untenable and only leads to a transfer of wealth. The Euro is the modern day paradigm of the biggest currency union experiment that fell apart in 1930s “the gold standard”. Euro on a consolidated basis is a weaker currency for Germany and a much stronger currency for countries like Greece, Italy and Spain. Over the years this fact has manifested itself in the increasing Current Account Deficit in Greece and others while at the same time an increasing Current Account Surplus for Germany (see graph).

This should have led to a decline in money supply within the domestic economies of these countries leading them into a deflationary spiral. However being part of the Euro Zone there was little restriction on the capital flows and the ECB accepted all the government bonds on equal terms at its discount window. So to avoid the deflationary scenario either the government of these countries stepped in by increasing their spending or the capital flows came in the housing/real estate sector attracted by the panoramic views and the blue hue of the Mediterranean Sea. In either case this led to an investment or consumption linked boom in the Mediterranean countries and a manufacturing linked growth in Germany.
So even as a transfer of wealth was taking place as many industries started to shift their bases out of the Mediterranean countries and malinvestments kept on growing an artificial façade of boom was maintained for some years delaying the natural adjustment process which has now become apparent when the credit/capital flows have slowed down much like the bust of 1930s that followed the decade termed as the “Roaring Twenties” and like then when the world was on a “gold standard”, this time it’s the euro that is causing a deflationary depression in these countries.
As many European Nations are now realising that by surrendering their rights to the printing presses in the hands of some foreign bureaucrats/technocrats they have given up not only given up their economic but also their political freedom. Although things might become worse for Greece in the coming days but hopefully after these elections this country would see light at the end of the dark tunnel that this nation has been traversing through in these last 5 years and in this process pave the way for the economic liberation of the other citizens of Europe who are forced to live under this flawed economic structure called the Euro which is serving nothing but fuelling the hubris of the political and economic elites.

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