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The Gift from the Greek Crisis: Exposing the Euro’s Weaknesses

by Andrew White  |  July 10, 2015  |  Comments Off on The Gift from the Greek Crisis: Exposing the Euro’s Weaknesses

If you have read my blog over the last couple of years you will know that I suggested that Greece would leave the Euro. As we now wait for Sunday and Germany to step down, and the IMF’s suggestion’s for Greek debt write-down and extensions to be swallowed, Greece could certainly claim to be close to expulsion.  But in fact I don’t think Greece will leave, not yet.  In truth they are close, but political pressure for “saving the euro” and their own skin will force Germany’s hand and Merkel will cave.  Even though the markets have pretty much figured out that a ‘Grexit’ is not that bad, politician skin will prove stronger than rational economic logic.  The truth is that Greece is so economically challenged (some say, “broke”) that it has little chance of becoming self-sufficient for years to come.  Even the newly proposed reforms will lead to a struggling Greece for years to come.

Greece has lived beyond its means for many years; the country didn’t really quality legitimately for the euro in the first place.  It’s standard of living is in excess of its productive resource capability.  To yield the excess profits needed to pay its current, and soon-to-be-expanded debts, implies years upon years of hardship and lower standards of living that no economy would bear.  So the issue is akin to a terminally ill patient.  And I don’t mean Greece, I mean the euro.

Greece is a side show: the real crisis is the design of the euro.  It is a half-baked single currency that has no shared liability, investment, and insurance framework across its member states.  The recent crisis has highlighted how increased union of additional organizations is needed if such challenges like Greece emerge again.  But since the entire European Project is an exploration in politics, not economics, those requirements show no signs of being met.  The very foundations of the EU are not centered on freedom of markets and economic stability: it was founded on the need of France to balance Germany politically, and to seat Germany at the center of a stable political framework.  The open market and free trade ideas were already making progress using other frameworks – and Britain – and Germany for that matter – were very active there.  France less so (for other reasons).

Until additional financial investment, risk and liability systems are put in place, akin to how the U.S. federal government works with its state level governments, the euro will always be at risk.  Today Greece, tomorrow someone else. It might and probably will be Greece next time.  But we can’t “fix” Greece: it is a business that needs creative destruction.  It’s the euro that is at fault.  Will the real cause of the Greek condition be “fixed”?  I see no chance at present. So I assume the euro will limp along until the next economic blip.  And I suspect that won’t be too far away.

My last point, only somewhat related to the main point of the blog, is that the saving of Greece within the euro also weakens Britain and David Cameron’s hand, regarding its’ EU membership.  The UK wants to re-negotiate certain policies with Europe, that several Nordic countries and much of Germany would support, if only privately.  If Greece was to be ejected from the euro, Britain’s hand within the EU negotiations, would be stronger.  Losing one partner is unfortunate.  Losing two is unforgivable – and much more expensive. With the saving of Greece, the injured euro would limp along and in fact those forces inside the UK that want to leave the EU would be emboldened.  So if Greece stays, I suspect that Britain’s chances of staying in the EU will fall.  The UK leaving the EU is an even bigger tragedy than Greece leaving the euro: the former is not required, the latter should have not have happened without reform at membership.

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Category: euro  greece  monetary-theory  monetary-union  uk  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a Distinguished Analyst and VP. His roles include Chief of Research and Content Lead for Data and Analytics. His main research focus is data and analytics strategy, platforms, and governance. Read Full Bio

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