By John Browne, cross-posted from Euro-Pacific Capital
Once again the crisis in Greece is threatening the unity of the entire euro zone. Many analysts are asking what must be done to restore viability to the Union’s weakest link. Lost in this discussion is that modern Greece, formed in 1830, has never really been required to stand on its own. Generations of support from abroad, typically given for strategic reasons, has created a false sense of prosperity in the country and has prevented the Greeks from accepting the realities of their current situation.
When Greece fought for its independence against the Ottoman Empire in the 1820s, the struggle became a romantic cause throughout much of Western Europe. Both money, material, and fighters poured into the country (Lord Byron being one of the most famous volunteers). After independence, Great Britain continued to subsidize the new nation, largely to create a bulwark against the Ottomans and the growing Russian Empire. (Greece was an important staging area for the Crimean War of the 1850s). This support continued through both World Wars. In the second half of the 20th Century, the power and popularity of the openly pro-Soviet Greek Communist party turned the country into one of the front lines in the Cold War struggle against the Russians. To tip the balance one way or another, both East and West poured money into the country.
In this context, drawing Greece firmly into the Western orbit, through its absorption into the euro zone, appeared to be the ultimate strategic victory for Western Europe. To Greece, the prospect of Eurozone membership held the enticing prospect of large hidden internal monetary transfers to offset the vastly differing economic performances between the so-called ‘Southern’, or ‘Mediterranean’, nations and those of ‘Northern’ Eurozone members. In its zeal to pull Greece into the Union, the EU ended up accepting figures (put together with the help of Goldman Sachs) that masked the country’s fiscal condition.
Germany, on the other hand, joined the euro for decidedly different reasons. Until overtaken recently by China, she was the world’s largest exporter. In order to protect the interests of its export machine, Germany agreed to trade its legendary Deutsche Mark for the relatively weaker euro in exchange for a protected trade zone that would guarantee the supremacy of German products in the world’s largest market. German politicians saw the euro as a unifying mechanism providing a means of creating a financial empire across the Continent. However, German citizens were accustomed to a strong currency protecting the value of their hard earned savings.
Furthermore, they retained horrific memories of currency debasement and collapse under their 1920s Weimar government. To overcome these fears, rank and file Germans had to be convinced that the euro would remain strong. In order to fulfill both opportunities, Germany’s leaders promised their people a sound euro. Greece and other Southern tier countries in the Union are perceived as threatening that commitment.
The newly elected left-wing Syriza party in Greece, led by Prime Minister Alexis Tsipras, has brought all of these simmering differences to a much fuller boil. Tsiprashas declared that Greece will no longer abide by the rules laid out in the 2012 bailout memorandum that had been dictated by the ECB/EU/IMF ‘Troika’. Tsipras maintains it was agreed to by a previous administration, but under unfair duress, and is, therefore, invalid. (Although this idea has not prevented him from asking that the Germans pay supposedly unpaid WW II reparations debts agreed to in 1953.)
After so many years of support, it appears as if Tsipras cannot allow for the possibility that the Northern Europeans will finally pull the plug. He is also banking on the hopes that the Germans do not want a precedent in which an exit by Greece encourages other Southern countries to leave as well, which might lead to a collapse of the euro. This has set up perhaps the biggest game of chicken in Europe since the Sudeten Crisis of 1938 and the Berlin Airlift of 1961.
This places German Chancellor Angela Merkel in a particularly difficult position. Against German urgings, the ECB recently announced $1.27 trillion worth of Fed-style QE. For years Germany had stood fast against the growing support for the ECB to follow the U.S. Federal Reserve into a policy of attempting to stimulate economic growth through quantitative easing, a process of printing money in order to buy sovereign debt, thereby increasing inflation and lowering long term interest rates.
The decision to go ahead with QE, despite its unpopularity in Germany, has generated among Germans great political anger and increasing disillusion with the EU. In this light, the prospect of giving more support to Greece, as the country threatens to abrogate prior agreements, could not come at a more politically awkward moment.
According to a new Emnid /N24 poll (1/29/15), only 16 percent of Germans agree with a partial write-down of Greek debt. While 33 percent would extend the repayment time schedule, a massive 43 percent of Germans are against any concessions whatsoever.
However, in the present increasingly anti-EU political climate, any mishandling of the Greek situation that leads to a Greek euro-exit could break the euro and lead to the collapse of the entire EU concept. As the EU has the world’s largest economy and the second largest currency, the effect of dissolution could result in a currency crisis and throw a shaky world economy into a catastrophic depression.
Should the Greek situation not be settled, the Anglosphere-led world faces massive political, economic and financial consequences. The EU is possibly its first great experiment in global governance. It believes it must not fail.
Given the entrenched interests, a political solution will likely be found that leaves Greece within the euro. The price may be increased political integration within the EU, with political incentives offered to Germany that will justify the financial costs borne by unwilling German citizens. However, when politics is involved, anything is possible. It appears as if the new Greek leaders are flush with victory and will be willing to risk a wider crisis in order to deliver on their campaign promises.
My hope is that Greece’s longstanding dependency on foreign support makes it a distinct case in the Southern tier. Italy, Spain and Portugal have not been on the front lines of strategic and ideological struggles as often as Greece has been over the past two centuries. As a result, their willingness to make additional demands from the North may not be as deeply ingrained. This means that even if Greece leaves, its exit may be a solitary one, which might result in a stronger Eurozone, and a stronger euro.
While investors might hedge long European positions, they could be wrong to sell Europe short. It is more likely than not that the Eurozone will find a solution that retains Greece, which may make the euro and certain European stocks look cheap relative to the U.S.