Greece and the Euro

[Ed_The_Gypsy]

Observations from the field:

We get mostly Euro-centric news here (ANYTHING but news of the US). The Euro crisis is kind of like the saga of OJ Simpson--an endless source of news.

Yesterday Greece announced that they will have to have new elections. The country is (apparently) irreconcilably divided between those who want to stay in the European Union and those who want to punish the lenders--Austerity vs. Growth. According to the news, the radical left is bound to win. The front-runner says that one of the first things they will do is raise the minimum wage. In the news just now is that there is a run on the banks. Greeks have almost drawn 800 million Euros from the banks as of now.

France has just replaced a conservative leader with a socialist leader.

There is talk, talk, talk on the tube about how 'growth' should be the priority instead of austerity.

I have the distinct impression that no-one in Europe has any idea about what should be done to achieve 'growth'. Everyone seems to think that it would involve getting more money from the rich countries without even promising to pay it back. Bon chance, mes amis.

As far as I can see, Greece has no option except to abandon the Euro and repudiate their loans. They can never pay them back in any case. They will go back to the Drachma and print money like crazy. Heavy inflation coming up. Expect one or two of Spain, Portugal, Ireland or Italy after that.

They all could get growth if they wanted to, IMHO, if they:
1) Eliminate corporate taxes.
2) Eliminate minimum wage.
3) Make their countries right-to-work territories and restrict labor action.
4) Eliminate all trade rules.
5) Eliminate sales taxes.
Of course, this is completely impossible, so expect social collapse. The left will take over everywhere. They already are. Right-wing groups will rise to challenge them in Europe (and Russia). They already are.

The late Milton Friedman predicted that the Euro would not survive its first financial crisis. It won't.

I hope Europe will.

 

[Sirka]

Drawn 800 million Euros from the banks

Observations from the field:

The late Milton Friedman predicted that the Euro would not survive its first financial crisis. It won't.
I hope Europe will.

+1
I would be taking money out, also. I actually have some euros and I see the value going down. I may buy some CAD, but Greeks will have no choice.

 

[Brat]

This will get interesting come winter when we have our own borrowing authority issues.

 

[ronocnikral]

so those greek bonds won't be a good deal?! DW has a background in long offset printing. Maybe she can tell me what to do (standard operating procedure anyway) and I can lift the heavy plates for her over in Greece?

Yes, growth! and with a flick of the wrist and a tap of my wand, viola! Even in the US, I am convinced there is very little ANY president can do to create job growth besides shut up, get out of the way and make sure there is a system which doesn't change (or threaten to change) each year (e.g. the tax code).

And to do solely through the gov't is....well, to summarize the comedian David Sedaris, we all think we will be the one lounging around party head quarters holding the clipboards.

 

[2B]

I am currently long the euro to the tune of about 65 euro left over from my last trip. I was in France during their first presidential election and I talked to an American woman that married a Frenchman 15 years ago. She was clearly a Hollande fan and bad mouthed Sarkozy for being too conservative. I made the comment that in the US we'd see all of the major candidates as being socialists. She shot back that Le Pen has ties to the fascists. When I said that fascism is still a socialist form of government, I totally lost her.

Ergo, what you have in your post has no chance of being implemented until the whole system totally collapses. Even then, I suspect it will take 2 or 3 generations to purge the system. In Hungary I found massive nostalgic support for communism amongst the younger folk. Most of the older Hungarians think they're nuts except the ex-commies.

As it relates to FIRE, it has me wondering about the weight of foreign funds in my equity allocation. Right now, 30% of my equities are foreign with 20% being Vanguard Developed Markets.

 

[2B]

Yes, growth! and with a flick of the wrist and a tap of my wand, viola! Even in the US, I am convinced there is very little ANY president can do to create job growth besides shut up, get out of the way and make sure there is a system which doesn't change (or threaten to change) each year (e.g. the tax code).

+1

Back when I thought I was "important," we could make money under almost any situation when things were stable. Shifting regulations, exchange rates, product pricing and raw material costs almost always led to us losing money.

My concern is that when the term "growth" is used it is really a codeword for more people doing nothing constructive in the government or increasing spending on things with no economic justification.

 

[Ed_The_Gypsy]

I am still 50/50 US/international equities--but heavy in foreign oil and emerging markets.

I have made no changes in my AA.

I really have no idea how to profit from this or avoid trouble. I am no George Soros.

My concern is that when the term "growth" is used it is really a codeword for more people doing nothing constructive in the government or increasing spending on things with no economic justification.

+1

The Greeks cannot spend more without leaving the Euro and printing money to beat Hell. Then they will continue to do nothing constructive and spend on things with no economic justification.

I love a train wreck.

 

[Ed_The_Gypsy]

Even in the US, I am convinced there is very little ANY president can do to create job growth besides shut up, get out of the way and make sure there is a system which doesn't change (or threaten to change) each year (e.g. the tax code).

When was the last time that happened?

 

[2B]

The Greeks cannot spend more without leaving the Euro and printing money to beat Hell. Then they will continue to do nothing constructive and spend on things with no economic justification.

They can do it as long as Germany (or someone else) keeps sending them money. The latest answer seems to be euro bonds. The problem with that is it would suddenly be directly against Germany's credit rating. This will quickly deteriorate as the rest of the euro zone keeps spending without restraint.

 

[Ed_The_Gypsy]

Ergo, what you have in your post has no chance of being implemented until the whole system totally collapses. Even then, I suspect it will take 2 or 3 generations to purge the system. In Hungary I found massive nostalgic support for communism amongst the younger folk. Most of the older Hungarians think they're nuts except the ex-commies.

From what I have seen, the countries that have a better chance of recovering than any western nation are among the former satellite countries of the Soviet Union--but not all of them. Estonia and Georgia seem to have the best start.

Stay tuned for developments.

 

[ronocnikral]

When was the last time that happened?

It's a working theory I have. If elected as president, people will initially bitch about the amount of time I am spending in Mauritius with the family doing "International Relations with a Muslim country," but things will pick up as I will let things work themselves out and I will be labeled the first "do nothing" president who is greatly successful, and retire at age 39 in Mauritius. I was aiming for 35, but the security of the pension I would get from being president may be worth the extra 4 years of non-work.

 

[FIREd]

[mod hat on]

We are walking a fine line here. European Politics are as off limit as US politics on this board. Please, focus on the economic aspects of the European crisis as they relate to FIRE.

[mod hat off]

 

[ronocnikral]

Certainly, many of us are invested in the Eurozone and have a vested interest in how all this plays out.

Estonia is the model country?! (albeit, a small country).

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15052012-AP/EN/2-15052012-AP-EN.PDF

And an excellent podcast. The Tuesday Podcast: The Euro's Model Student : Planet Money : NPR

 

[FIREd]

Certainly, many of us are invested in the Eurozone and have a vested interest in how all this plays out.

I have much to lose in the Euro crisis. I too am interested to see how it plays out.

 

[eytonxav]

I have been puzzled how the euro has held up as much as it has over the last year. DD is studying abroad next month, so maybe her spending power will continue to improve.

 

[Sirka]

we are also printing $

I have been puzzled how the euro has held up as much as it has over the last year.

+1
I think it's the speed of the printing presses, that determines the stronger currency at any one day. It's all relative. .

 

[mystang52]

Hmmmm, at least for the short term I hope nothing definitive happens. DW and I are headed to Italy and Greek Isles cruise, in July.

 

[MichaelB]

Let's see. Last year there was a growth scare and a Greek \ Euro scare. The euro is higher now, as are French and German stock markets. I would say Greece leaving the euro is now priced in and is the only hope Greece has for any kind of economic recovery. Look to Brazil, Argentina, Mexico and the Asian countries for a roadmap. Devaluation is a prerequisite and reforms (labor, business, tax) help a lot.

I don't think Spain or the EMU are ready to split, and that would be traumatic. The Spanish stock market, however, is looking interesting now that is below it's 2009 low.

 

[2B]

+1
I think it's the speed of the printing presses, that determines the stronger currency at any one day. It's all relative. .

Yes and no. What I've seen is deleveraging by many European companies (especially their banks) by selling non-European assets. They are taking the cash and bringing it onto their balance sheet in euros. That helps but so does the higher interest rates in European debt. I think this latest drop in the euro may be due to the realization that countries other than Greece may also be at serious risk. I suspect euro bonds will only debase Germany's balance sheet and cause the end of the euro as we know it.

 

[eytonxav]

Let's see. Last year there was a growth scare and a Greek \ Euro scare. The euro is higher now, as are French and German stock markets. .

Over he past year (12 months) the Euro was higher than it is now, you must be thinking back to 2010 timeframe.

 

[Ed_The_Gypsy]

Update...

Greeks have been withdrawing their money from the banks, but I cannot call it a run yet. Accounts say that there are no long lines at ATMs. An official source said that 20 to 30% of personal accounts have been withdrawn (over how long a period? don't know). A reason given was that they need the money to live as many pensions and unemployment benefits as well as jobs have deteriorated. But here is a more dire comment: Has The Greek Bank Run Started? | ZeroHedge

I have been wondering 'What would happen if...'. Here is one account: Nightmare Scenarios if Greece Exits the Euro - Global - The Atlantic Wire

This appears to be the first effect:

Interest rates skyrocket Michael Arghyrou, senior economics lecturer at Cardiff Business School, has bad news for Greeks in need of a loan. "Interest rates will have to double and all mortgages, business loans and other borrowing will become much more expensive," he says. "There will be no credit for Greek banks or the Greek state. That could mean a shortage of basic commodities, like oil or medicine or even foodstuffs." Of course, that's not even the worst of it. "The worst case scenario would be a social and economic breakdown, perhaps even leading to a totalitarian regime," he says.

Other effects (in what I think is the most probable order of probability)(from the article):
1) Unemployment surges [guaranteed]
2) Europe increases bailout fund [maybe for Greece; more likely for the next country]
3) Bank runs spread to other countries [uncertain; would require mass panic which does not seem likely]
4) Greek citizens migrate en masse. [uncertain. Greeks have always come to the US, for example, for work, but if they had nothing, would they go anywhere? Even to another Schengen country? And why would Greece close its borders to keep its people in? see article.]

Here is another view on 'the-day-after': What Happens If Greek Payments Stop: Goldman's Thought Experiment On "The Day After" | ZeroHedge

Great Britain is preparing a contingency plan: Britain Would Treat the Collapse of the Euro Like a Natural Disaster - Global - The Atlantic Wire

Of all the possibilities above, it seems to me that crippling interest rates in Greece and higher unemployment are the two most likely events. Very tough on Greece, but the European Union could still take steps to prevent the disaster from spreading. Something like a continental-wide WPA seems like a good idea. That seems unlikely since it would require a different mind-set and a lot more co-operation than they are used to.

Keep an eye out for a European junk-bond mutual fund to be established.

What do you think?

 

[Brat]

Interesting discussion on NPR today about currency during Roman days. Their empire was larger than the EU and two types of currency existed within their realm: Roman and local. Those ancient Roman finance ministers were not fools...

 

[eytonxav]

While I can't really speak to the situation in Spain, Portugal, Italy and France and the impact on the euro and rest of world, it seems to me the Greek tragedy in itself is much ado about nothing.

 

[Nemo2]

Here's a juxtaposition with New Zealand 20 years ago:

New Zealand became part of a global economy. With no restrictions on overseas money coming into the country the focus in the economy shifted from the productive sector to finance.[36] Finance capital outstripped industrial capital[32] and redundancies occurred in manufacturing industry; approximately 76,000 manufacturing jobs were lost between 1987 and 1992.[33] During wage bargaining in 1986 and 1987, employers started to bargain harder. Lock-outs were not uncommon; the most spectacular occurred at a pulp and paper mill owned by Fletcher Challenge and led to changes to work practices and a no-strike commitment from the union. Later settlements drew further concessions from unions, including below-inflation wage increases, a cut in real wages.[37] There was a structural change in the economy from industry to services, which, along with the arrival of trans-Tasman retail chains and an increasingly cosmopolitan hospitality industry, led to a new ‘café culture’ enjoyed by more affluent New Zealanders. Some argue that for the rest of the population, Rogernomics failed to deliver the higher standard of living promised by its advocates.[32]

Over 15 years, New Zealand's economy and social capital faced a steady decline: the youth suicide rate grew sharply into one of the highest in the developed world;[38] the proliferation of food banks increased dramatically;[39] marked increases in violent and other crime were observed;[40] the number of New Zealanders estimated to be living in poverty grew by at least 35% between 1989 and 1992;[41] and health care was especially hard-hit, leading to a significant deterioration in health standards among working and middle class people.[42] In addition, many of the promised economic benefits of the experiment never materialised.[43] Between 1985 and 1992, New Zealand's economy grew by 4.7% during the same period in which the average OECD nation grew by 28.2%.[44] From 1984–1993 inflation averaged 9% per year, New Zealand's credit rating dropped twice, and foreign debt quadrupled.[45] Between 1986 and 1993, the unemployment rate rose from 3.6% to 11%.[46]

 

[2B]

There are already runs on other European banks. Spain is being particuarly hard hit. I suspect there is a concern that the "guarantees" on bank deposits may go the way of Iceland. Also, the fear of leaving the euro is credible in any number of countries. If that happens, you can expect all bank deposits to magically get converted to the new currency when it happens. This currency will then immediately be devalued in the market place. Governments can try to enforce price controls but the ultimate control will be whether anyone is willing to sell anything at the controlled price. Anything imported would have to be allowed to increase in price.

My foreign funds are all down 25% from their highs last year. It doesn't look good.