Greece holds out hope

The people of Greece have set themselves for a historic re-election on June 17, the results of which may reshape not just the European, but the global political and the economic landscape. Financial markets the world over are still to recover from the elections in May. Following Sunday's elections, the Greek electorate may not just free themselves from the shackles of a disastrous currency union, but in the process may also make the citizenry of the world reject any future bailout of financial institutions with taxpayers' money.

DISTORTED BAILOUT

Against the backdrop of all this talk of over $300 billion provided to Greece in form of bailout money, the fact is that over the last 2 years Greece has just served as a conduit for bailing out insolvent European financial institutions. Just 20 per cent of the bailout money reached the Greek masses. The rest was divided among the various financial institutions.

The so-called “radical left” Syrzia party of Greece, not ready to join any pro-bailout coalition, has seen its popularity soar after the first round of polling in May. If it ends up forming the next government after June 17, then all bets are off. The party's leader Alexis Tsipras has rejected the bailout terms as null and void, but has publicly stated his intention to keep Greece in the Euro. This position is untenable, as a rejection of the bailout agreement would mean a Greek Euro exit.

TRANSITION PERIOD

Leaving the Euro would surely put Greece under the weather for a couple of years, with the country facing the prospect of bank runs and a bout of high inflation, possibly even hyperinflation (when drachma is reintroduced). But if it is done in a planned way, the damage could be contained somewhat — like pegging the drachma with Euro to start with, and then making it ‘ float' as time passes.

This can be accomplished with assistance from European Central Bank and IMF; ECB still holds a substantial amount of Greek debt. Moreover, Greece would have something to look forward to after this brief period of uncertainty. This prospect is certainly far better than a never-ending depression, that has already carried on for five years. The reason why no currency union has ever worked without a fiscal union is because it only leads to a transfer of wealth. The Euro is the modern-day equivalent of the biggest currency union experiment that fell apart in 1930s — the gold standard. The Euro works out to be a weaker currency for Germany and a much stronger currency for countries like Greece, Italy and Spain.

Over the years this fact has manifested itself in the increasing current account deficit in Greece and others, and an increasing current account surplus for Germany. This should have led to a decline in money supply within the domestic economies of these countries, leading them into a deflationary spiral. However, being part of the Euro Zone there was little restriction on capital flows, and the ECB accepted all government bonds on equal terms at its discount window.

So, to avoid deflation, either the governments of these countries stepped in by increasing their spending, or capital flows entered the housing/real estate sector. In either case, this led to growth based on manufacturing in Germany.

So, even as a transfer of wealth was taking place as many industries started to shift their bases out of the Mediterranean countries, mal-investments kept up an artificial boom, delaying the natural adjustment process. The situation today is much like the bust of the 1930s that followed the “Roaring Twenties”. Like then, when the world was on a gold standard, this time it's the euro that is causing a depression in these countries.

European nations are now realising that by surrendering their rights to the printing presses in the hands of some foreign bureaucrats/technocrats they have given up their economic and political freedom. Hopefully after these elections, Greece would see light at the end of the tunnel. This process could pave the way for the economic liberation of the other citizens of Europe, who are forced to live under this flawed economic structure called the Euro.

(The author is an independent financial consultant at Random Chalice Financial Research, Delhi.)

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