Greece & the Euro

19 January 2015
Once again Greece is teetering on the edge with the prospect of anti-austerity Syriza becoming the main party of government, the latter of which are riding high on a wave of anti-bailout feeling. While I feel that the Euro is now in a better position than it was 3-5 years ago, it looks like the previously unthinkable thing of a country being cut loose might finally happen.

Theory & practice

The idea of a continent-wide single currency in itself is a sound idea, as these days an ever-increasing quantity of commerce is cross-border. The typical non-financial company simply does not want to mess around with currency accounts, and on its own few if any European currencies really mattered when put up to the likes of the dollar or the Yuan. The ERM failed because there was no real cross-border attempt at keeping the constituent currencies synchronised. Problem is that a single currency involves discipline and trust. For smaller European countries it was mostly business as usual, but since the Euro occupied the gray area between economics and politics, fudges slipped into the system. Greece basically took the piss, and cooked the books so much that even revised historical figures are still considered suspect. The whole scheme rested on assumptions about government integrity that history has shown to be dubious at best.

Chapter 7 for countries

The main effect of the Euro on the Euro-zone crisis is to fundamentally change how countries in serious trouble can behave. In the past the usual remedy was to debase the currency, but since that is no longer an option, countries instead go bust in a way that is not that far off how private sector bankruptcies occur. In Cyprus people got cents on the Euro in the same way company creditors get cents on the dollar when a company goes under. People getting used to this idea is why events in one Euro-zone country don't spill over into all the others as much as they used to.

I don't see any clean exit strategy for Greece, and I think the only reason they haven't been given the boot is because most of their debt is now owed to other Euro-zone countries. The private sector has long cut and run, holding only around 15% of bonds. There is still issues with the reliability of Greek financial data, so it will be a long time before there is any market for Greek debt. Greece's budget deficit is living on borrowed time, and noises from Finland about Greek bailout extensions may finally bring the day of reckoning.

Greeks themselves like the Euro because they know that the actual (as opposed to nominal) value of their Euro notes & coins cannot be fiddled with by the Greek government. Whether Greece remains in the Euro-zone or not is irrelevant as no sane Greek would accept a reintroduced Drachma. Smart Greeks have long moved their main savings overseas, and Greece's private sector would still operate in Euros even if Drachma was reintroduced. Drachmas would end up being monopoly money for the exclusive use within the Greek public sector ecosystem.

The future

The general pattern of predictions I made back in 2011 on the whole turned out fairly accurate, although Portugal seems to have done a better than expected job of pulling itself away from the edge of the abyss. The Euro won't break up, as many countries have little appetite for going back to a sleuth of individual currencies, and in any case withdrawal wouldn't fix underlying structural issues such as bloated governments. While the Euro remains popular the institutions associated with it have come under heavy populist attacks, and some of the things supposedly anti-austerity parties are pressing for would be incompatible with continued membership. Any euro exits will be the product of untenable positions rather than desire.

This brings us to Greece, which should never have been allowed into the Euro-zone in the first place, and does not seem to have made any serious inroads into fixing its structural problems. The way it is relying on ECB and IMF bailouts for deficit servicing is Last Chance Saloon, yet unlike the other PIIGS, it seems content to ride outs its borrowed time until the bitter end. It would not surprise me if Greece ends up throwing in the towel and defaulting on the last of its debt obligations, and ends up being a Euro-zone country in name only. There is no mechanism for a country to leave the Euro-zone, but I don't foresee how Greece can maintain influence.