Sydney M. Williams “A Greek Tragedy”
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In the end, it would have made no difference which way Greece voted. The country is bankrupt, not only financially, but morally and politically. They are proof that you cannot go on spending more money than you take in. Greece is a manifestation that redistribution policies, whether from Socialism or an overly generous welfare state, do not work. No matter the form of government, its costs fall on the backs of the people. In a democracy, the people can vote for change, but when the majority receives more than they give, the end game heaves into sight.
The problem for the West with Greece is less the economic consequences, or even the ideological ones, than the geo-political changes that could evolve. Of particular concerns are the possibility of a return to authoritarianism – either from the right or the left – and, second, the relationship of Greece to Russia. Keep in mind; crises are not wasted by opportunists, and Putin is an opportunist.
Greece’s economy is less than 2% of Europe’s, so the effect on other nations will be limited. In severing ties with the Euro, though, many Greeks will suffer. The economy will persist in deep recession. But already 27% of the working population is unemployed. And 75% of those out of work have been so for more than a year. A new currency (the old Drachma?) will be subject to market forces that will determine its value. Nevertheless, a Greek exit from the Euro should happen, both from the perspective of the integrity of the Euro, but also because depreciated Greek assets will, in time, become attractive to outside investors.
Current investors in Greek bonds will suffer, but that is a risk all bond buyers assume. Caveat emptor is not limited to real estate. Bond markets work most efficiently when the threat of bankruptcy is real. German investors bought Greek debt seemingly ignorant of the risks involved. Consequently, Greece was able to borrow money at what proved to be below “real” market rates. Had they had to pay fair market rates, they might have been more circumspect. As for devaluation, Greek assets and vacations will become increasingly attractive to non-Greeks. The Greek people will suffer, but that is already happening. The important thing is to set the country on a course for future economic growth.
A risk is that from the rubble a “strong man” emerges. Restoring a culture of work and responsibility may be impossible until the final nail is driven into the coffin of Socialism. While those of us in capitalist countries can see opportunity when policy decisions emasculate an economy, it will be more difficult for those born and bred into a culture of paternalism. Greece was governed by a military junta in the late 1960s and early ‘70s. A return to such a government is an unfortunate possibility. Also possible is that the left-leaning Alexis Tsipras will exercise firmer control over the government and economy.
Russia will watch developments with interest. Since the collapse of the Soviet Union and the simultaneous break-up of Yugoslavia, The former Soviet Union has no close allies with access to either the Adriatic or the Mediterranean. They will be quick to seek ties with any government that may emerge. So, while exit from the Euro is all but inevitable, Europe should maintain close political ties to whatever government emerges. Greece, it should be remembered, has a long history with the East, since the days when it was governed from Constantinople. It would be a mistake to let Greece fall out of the European Union and NATO.
It was the accumulation of debt and unfunded liabilities that brought Greece to its knees. Its debt alone now equals two times its production capability – its GDP. While Greece is on the leading edge of this tide, Spain, Portugal and Italy are not far behind. Detroit, Puerto Rico and Illinois remind us that debt contagion is not limited to Europe. Central bankers created a “catch-22” situation. In keeping interest rates too low for too long, they encouraged debt accumulation on the part of governments and speculators, to a point where they now cannot afford to raise rates.
Western Europe promoted social welfare governments in the post-War years. Rebuilding an infrastructure that had been destroyed (with the help of the U.S.) allowed for sustained economic prosperity in the early years. Some nations built successful welfare states, but most adhered to a hedonistic philosophy of living for the day, with little concern for the future. Some were more successful in finding the proper balance, but most placed emphasis on pleasure rather than on effort. And, of course, ancient Athens was the home to Epicureanism. As money began to run out, the instinct of governments with controlling interests in the economy was to implement “austerity.” By austerity they mean continued high taxes and starved government programs – a policy that cannot work in the real world. What they needed to have done was cut taxes, reduce regulation and let free markets work, but, of course, that would mean giving up control – an anathema to bureaucrats.
The human instinct, however, is to survive and a devalued currency will create values – not without pain. But attractive prices, in an environment where the rule of law prevails and investors can be assured their property will not be nationalized, will attract investors. Tourism and vacation homes are among Greece’s special attractions. The mainland and its islands should become more of a destination than they now are. A Greek exit from the Euro should happen, in my opinion, but not so from the European Union. The problem will be that the country – like a company that has assets, but has been mismanaged – will be “in play.” Any vacuum created by an absentee Europe or the U.S. will be filled by Russia, who will be – if not already doing so – whispering sweet words of comfort into the ears of a receptive Greece. In the end, democratic capitalism is the best answer, but it is my guess that won’t happen anytime soon. Greece has become a Greek tragedy – in this case, a self-immolation.
The Opinions expressed above are mine alone, and do not represent those of the firm Monness, Crespi, Hardt & Co., Inc., or of any of its partners or employees.
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