Greece No Vote Exposes Eurozone Flaws

By John Richardson

euro-collapse.topA MAN who is drunk on somebody else’s money attempts to cross the road without checking for oncoming traffic and is hit by car. Both of his arms are broken.

An ambulance arrives with a team of medics on board who loaned the man the money.

The medics tell him this: “This is your own fault, you should have spent our money more wisely. So instead of taking you to hospital, we are just going to give you a pair of crutches so you can get back to work and earn the money to pay us back. And, oh, by the way, just to make sure you get the message that you have to better manage your finances in the future, stand still whilst we break both your legs.”

Rightly or wrong, this is how Greeks feel that  that they have been treated by the EU. This is not surprising, given that it is easy to point the finger at austerity  as the reason why Greece’s economy is 25% smaller than before the 2010 bailout programme began. Since then, youth unemployment has also risen to more than 50%.

Let’s look at that this from the perspective of the rest of Europe, though.

German and other Eurozone governments are terrified of debt forgiveness. The reason is that their electorates might discover they are in line to pay the bill for Greece defaulting on its debts. The German part of the bill could easily be €86 billion, and in a worst case could be as much all of Greece’s €322 billion, according to the respected IFO Institute.

But is hard to see how anything will work except debt forgiveness, given that Greece’s  GDP in 2014 was only €238 billion against debts estimated at €322 billion.

In addition, the EU’s east European members are worse off than the Greeks and receive lower pensions. They have also had to put up with their versions of austerity, and so seem to be in no mood to allow Greece to write-off its debts. Spain, Portugal and Ireland have also had to endure austerity and so see little reason to bend the rules in favour of Greece.  And the Dutch, Finns and Belgians share the same views as all the above – that upholding the rules matters.

This  only leaves Italy and Spain as being perhaps in favour of giving the Greeks a break.

The route cause of all the divisions go back 25 years, as fellow blogger Paul Hodges pointed when he wrote: “At the moment you have a currency zone with a free trade area, plus some aspects of political and economic union. This half-way house is essentially unstable, as Helmut Kohl and Francois Mitterrand agreed back in 1990 when calling for full European political union.”

So you end up with all the resentment and sense of hopelessness in Greece that led up to Sunday’s “No’ vote in the Greek plebiscite.

Financial markets will be in turmoil because of all the uncertainties about what comes next. This turmoil has every chance of including a sharp downward correction in the oil price.

But whatever happens today as financial markets open, it is hard to see how where there is the basis for a long-term solution.

If Grexit occurs, “bigger countries like Spain and especially Italy may decide they’d like to benefit from a devaluation to return to growth and leave the Eurozone themselves. This would ring the death knell for the common currency,” said Megan Greene, chief economist and Manulife. This makes absolute sense to me.

Let’s assume that instead the Eurozone gives in and finally provides Greece with the debt relief that it seems to need. German politicians, as I said, would have to explain to their voters why Germany has been left with such a huge bill, whilst the electorates of Italy and Spain will wonder why they have had to endure austerity with no debt relief.

So, no matter what the ultimate outcome of the No vote, the Eurozone will struggle to get through this crisis intact.