The Euro will fail and become the Zeuro – when that happens no one knows but as with the immutable laws of the physical universe, economic laws cannot be ignored. The Euro is an unnatural currency area, binding together states that have little in common qua trade, business, investment and interest rate patterns. Though the Euro does save cross border currency exchange and related transaction costs, these savings are minimal when compared to the bankruptcy of an entire Continent. Fixed exchanges around a fiat currency, with no backing in gold and silver is doomed to fail. It really is that simple. You might as well make French croissants your Continental currency.
Marx was wrong. Economics does not trump politics. Political will always wins over matters of profit. The reason why Greece will be given more welfare this year, next year and the year after, is that French and German banks have some $1.6 Trillion of exposure to shaky nation-states and their sovereign debt. You can bet your last Euro that the Eurocrats will suck the peasant tax-payer dry to pay off their political abettors and money-men. 'System-risk', 'contagion', 'financial collapse', and of course the children's future will be invoked to transfer trillions of other people's money to banks and politicians who made bad choices, poor policy and lousy investments. More welfare to Greece is a waste of money. The game is over. The Greeks entered the Euro to hide their bankruptcy. But 10 years on their dirty secret is discovered. Own up to it, and do what has to be done – declare an orderly state bankruptcy.
The issue is not just moral hazard. The issues are systemic and brutal. Regardless of how they prop up the system and manipulate markets the EU – not just Greece – but every state is technically bankrupted. Over 600% of GDP is owed in short or long term off the balance debt. As Braudel wrote in his study of capitalism, no state in the modern period survived a level above 200%. One of the causes of the French Revolution was the fact that the French state every generation for 200 years went bankrupt. Nazi Germany was in a financial implosion in 1939, making war inevitable. The Russian fascist experiment at world empire was in economic tatters by 1965 hanging on only with transfers from France and West Germany in technology and hard currency. Yet all of the above creations were deemed 'super states', or super-powers. It was all a chimera.
If I were running Greece I would default on the debt as Argentina did in 1998, and leave the Euro and do both in an orderly, transparent and rational fashion so the markets would not be crushed. Here is why:
-If Greece defaults it will pay 50 basis points more for its future debt issuances. This is the historical average after a country defaults. It is the same or less then countries pay which have unsustainable budget deficits.
-A 10 % budget deficit will never be cut even if they pass the austerity measure. It is one thing to pass a budget. It is another to implement it as your citizens riot and attack police. It won't happen. Fiscal reductions will occur over a period of years with proper leadership. Greece, like all of Europe suffers from a cultural Marxist malaise which will take a long time to repair.
-Reorganize the finances along a 4 year plan to reduce government by 1/3, lower taxes, attract capital and create jobs. If this is accomplished the market reaction might well be positive not negative.
-A new drachma would allow Greece to set a currency exchange rate to revive tourism and exports. This buys the Greeks time to restructure their economy and begin the development of a more forward-looking, balanced economy, relying more on innovation than government for jobs.
-Interest rate and monetary policy control would allow the Greeks to start to address long term unemployment issues and the lack of capital investment. Interest rates must be higher than in the remaining Euro zone to attract capital and taxes and regulations a lot lower [a flat tax would almost be mandatory in order to bring the huge gray economy into the real economy].
-Huge cuts are going to be needed but can only be done over time. The drastic IMF budget reductions are the minimum and are obvious, but given the nanny-state mentality of Greeks it simply cannot be done in one year.
Greece is tied down by the Euro and the ceaseless socialist offerings which pour out of Brussels and now control some 60% of local Greek legislation. The ancestors of Marathon, Thermopylae, Salamis, and the 19th century war against Turkish barbarity need to rise up to claim freedom from the useless parasites in Brussels. Yes having a single currency across many countries is nice. It helps you on a holiday. The paper money is pretty and has nice colors and images. But so what. The reality is that most of Europe including Greece lies outside of a natural currency area. Back to basics. Greece should default on its debt and begin the long crawl back to nation-state adulthood. They can do without the children's Euro candy.