Playing the Hand Dealt

Does anyone really care about Greece anymore?  The ‘Grexit’ talk has been going on for years.  It became dull, tedious, and exhausting long ago.

Unquestionably, Greece’s relationship with Europe is ugly.  Greece owes more money than it can possibly pay back.  But the European Union won’t let them default.  Somehow the can continues to get kicked down the road until it must get kicked again.  Why not just let Greece default already?

Greece’s economy makes up only about 2 percent of the euro zone’s total GDP.  Certainly, the departure of Greece wouldn’t be a major loss to the European Union.  They’re significance to the European Union’s economy is a mere gnat on an elephants behind.

But the Greece problem does expose a flaw in bloc currencies.  Namely that unifying different countries – and different cultures – under the same currency isn’t the prodigious idea it was thought to be.  Some countries are greater credit risks.  Their debt should have a greater premium.  Other countries are more prudent.  The market should reward them with a cheaper credit price.

Doing away with this natural market phenomenon pushes the world out of harmony.  Problems then arise.  Greece took the artificially cheap credit and spent it.  Then, because the European Union wouldn’t allow them to default, they took more cheap credit and spent that.  On and on it went…

Don’t Step Out of Line

When it comes down to it Greece deserves our appreciation.  For they’ve shown the world that bloc currencies are insane.  That they don’t produce greater stability and harmony, as advertised.  But, rather, they produce greater instability and discord.

With a little luck the brain trust in North America will have some reservations about abolishing the dollar, loonie and peso, and aligning the United States, Canada, and Mexico under the amero.  We don’t know if North American policy makers and financial engineers will appreciate this key insight out of Greece and Europe.  They may choose to ‘improve’ upon Europe’s mistakes.

In the meantime, there’s plenty of gnashing of teeth – and finger pointing – to go around.  “Can anything pull Europe back from the brink?” questioned Nobel Laureate Paul Krugman on Sunday afternoon, in a post aptly titled, Killing the European Project.

“Word is that [European Central Bank president] Mario Draghi is trying to reintroduce some sanity, that [French president Francois] Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past.  But much of the damage has already been done.  Who will ever trust Germany’s good intentions after this?

“In a way, the economics have almost become secondary.  But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line.  This has no bearing at all on the underlying economics of austerity.  It’s as true as ever that imposing harsh austerity without debt relief is a doomed policy no matter how willing the country is to accept suffering.  And this in turn means that even a complete Greek capitulation would be a dead end.”

Playing the Hand Dealt

Germany, in short, has had enough of Greece’s spendthrift ways.  We would too.  Financing bailout after bailout, with Greece continuing to miss their reform targets, would at some point become unacceptable.  That point was passed years ago.

Here at the Economic Prism we don’t point fingers.  Germany is not the evil creditor.  Greece is not the malevolent spendthrift.  They are both just playing the hand they’ve been dealt.

Political arrangements have put them in positions that are at odds and untenable.  Radical government agreements sacrificed national sovereignty for a mythical ideal.  The fact that it is failing shouldn’t be a surprise.

Greece exiting from the European Union and defaulting on its debt is the best option.  Obviously, this would be disruptive.  Financial markets may react violently.  The European Union may come unraveled.  But the other options are worse…

Extending more credit.  Pretending everything will be okay.  This approach has enlarged the problem and made it worse.  Markets may not always be kind or agreeable.  But they’re swift and they exact reality on technocratic prevarication every time.

Alas, the powers that be continue to resist it.  Prime Minister Alexis Tsipras rolled over at the 17th hour, agreeing to the reform demands of Germany.  These same demands were the ones rejected by Greek voters last week.  Greek parliament must approve them on Wednesday.

Bluff or no bluff, Greece should walk away from the table.

Sincerely,

MN Gordon
for Economic Prism

Return from Playing the Hand Dealt to Economic Prism

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