Default or debt forgiveness the options in Greek elections

Economic growth

SHARE THIS STORY

AlchemistWithin our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”.  That was the statement by European Central Bank head Mario Draghi in July 2012, where he aimed to draw a line under the Eurozone debt crisis.

Yet here we are in December 2014, and the crisis is back again and likely to become worse.

The problem, as I have argued since September 2011, is that current central bank policies are simply a modern form of medieval alchemy, and cannot possibly solve the debt problem:

Alchemists have always claimed to be able to perform the impossible.  The most common claim was that they could turn lead into gold.  In Europe, the European Central Bank has been trying the same trick.  It claimed to turn near-worthless Greek bonds into German-quality euros.  Now its German board member Jürgen Stark has followed German Bundesbank president Axel Weber in resigning over the issue.  The reason is obvious:

  • The ECB action can only work for a short period
  • Greece, as the blog has argued since May 2010, will never be able to pay its bills
  • Germany will then end up paying the bill, when it is finally agreed that lead is not gold”

And since then, Greece’s situation has become far worse.  Youth unemployment is now above 50%, whilst its economy has shrunk by a quarter since the crisis began.

Unsurprisingly, therefore, its pro-austerity government was finally forced to resign this week.  Elections are due on 25 January, with the populist party, Syriza, currently ahead in opinion polls.  Their declared policy is to write off around half of Greece’s foreign debt – leaving Germany to pay the bill.

EUROPE’S ELITE CONTINUE TO IGNORE THE IMPACT OF THE AGEING BABYBOOMERS
The real tragedy is that Europe’s political elite still continue to believe that their alchemy can magically create economic growth.  They refuse to accept the logic of common sense that Europe’s ageing BabyBoomer population make it  impossible to return to the Boomer-led levels of SuperCycle growth.

Instead we need new policies, as suggested yesterday in an excellent article by John Plender in the Financial Times.  One key issue is that the German word for debt, Schuld, also means ‘guilt’.  As he writes:

The logical way forward is debt forgiveness. Yet a moralistic perception of creditors as inherently virtuous and debtors as profligate sinners stands in the way (no matter that such “profligates” as Spain and Ireland entered the crisis with government debt way below the German level). So, too, does a selective German historical memory.

“The paradox of the German view on debt is that Germany has been the biggest developed world beneficiary of debt forgiveness in recent memory. In the postwar London Debt Agreement, German external debt was substantially written off or deferred. The West German economic miracle was thus launched from a clean balance sheet while the Allies remained heavily indebted.”

Deflation is inevitable in the Eurozone, as the oil price falls.  This will make it even more difficult for today’s debt to be repaid.  Printing more money as the ECB now propose will simply increase debt levels, making a bad situation worse.

In turn, this will enable populist parties such as Syriza to build on their success in last May’s European elections.

PREVIOUS POST

Chart of the Year - China's auto sales bubble begins to burst

30/12/2014

‘How China fooled the world’ was the subject of an excellent BBC doc...

Learn more
NEXT POST

G7 births in 2013 equal Great Depression year of 1933

02/01/2015

In 2013, there were fewer births in the G7 countries – responsible for ne...

Learn more
More posts
What’s next for Brexit and chemicals?
04/12/2019

The UK is about to go to the polls again to try and decide the Brexit issue.  Chemicals will be one...

Read
Global economy hits stall speed, whilst US S&P 500 sets new records
01/12/2019

Whisper it not to your friends in financial markets, but the global economy is moving into recession...

Read
Budgeting for paradigm shifts and a debt crisis
27/10/2019

It is now 8 years since John Richardson and I published our 10-year forecast for 2021 in Boom, Gloom...

Read
Paradigm shifts create Winners and Losers
20/10/2019

MY ANNUAL BUDGET OUTLOOK WILL BE PUBLISHED NEXT WEEK Next week, I will publish my annual Budget Outl...

Read
Markets face major paradigm shifts as recession approaches
06/10/2019

Major paradigm shifts are occurring in the global economy, as I describe in a new analysis for ICIS ...

Read
No Deal Brexit still a likely option if opposition parties fail to support a new referendum
15/09/2019

Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit las...

Read
UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October
28/07/2019

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or ...

Read
London house prices edge closer to a tumble
21/07/2019

After the excitement of Wimbledon tennis and a cricket World Cup final, Londoners were back to their...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more