Jun 27th 2015

The EU, the Grexit, and Market Failure

by Daniel Wagner

Daniel Wagner is CEO of Country Risk Solutions, a Connecticut-based cross-border risk advisory firm and author of the book Managing Country Risk. CRS provides a range of services related to the management of cross-border risk. He is also Senior Advisor with Gnarus Advisors.

Responsibility for Greece's and the EU's current dilemma rests with all parties - Greece, the ECB, and the banks. But each party is so busy pointing fingers at everyone else they appear to have lost any sense of introspection (if they ever had it to begin with). It took all of them get into this mess, and it will take all of them to get out of it. This means that all the parties must be willing bear their fair share of pain if there is to be a solution to Europe's debt problems.

European governments wanted so badly for the Euro and EU to be created that they looked the other way when any of them were clearly not eligible to become (and stay) members under the budget deficit guidelines, but were allowed to do so anyway. They are all now paying the price. The EU and Euro 'experiment' are, in the end, textbook cases of market failure, because 'the market' did not work. Some member countries simply lied to get in, there weren't adequate regulatory mechanisms in place to ensure that the EU's own debt guidelines were adhered to, and there were no immediate consequences if they were not.

In an era where frothy bubbles have appeared (again) globally in virtually every asset class (implying that collectively, we have learned very little as a result of the Great Recession), what will it take for the power brokers to see that debt problems cannot be solved by creating still higher levels of debt? More debt has been accumulated over the past 7 years by the world's governments than all the debt generated prior to 2008. In the end, all the money printing is backed by nothing, and there is no chance that the world's governments can afford even to pay the interest on all that debt - much less the principal.

Europe's (and the world's) banking system is crumbling under the weight of its own hubris, largesse, and irresponsible lending. Given that Greece's debt can clearly never be repaid, lenders should get their head around the reality that it must be largely written off - and the sooner the better. The same will likely prove to be true for the other Highly Indebted European Countries.

It should be abundantly clear to everyone by now that throwing more money into a black hole (Greece) hasn't worked, and isn't going to work. The Greek people elected Syriza to end the endless cycle of adding more debt to the pile, raising taxes, and imposing more austerity. For that sin, the current Greek government is characterized by many in the EU as a 'fringe' government - even though the majority of Greek people voted them in with a clear mandate to do exactly what they are attempting to do.

By the same token, it should be evident to the Greek government, and its people, that job number one has to be to restore a foundation for growth, which cannot be done while holding on to the illusion that business can continue to be done as it has been done. It is folly for the Greek government to believe that it can raise the funds necessary to rebuild the Greek economy by raising taxes. The Greek government has historically failed miserably trying to do just that.

So while the ECB and IMF appear only to be willing to do enough to let Greece hang on as an EU member, Greece only appears to be willing to do the bare minimum required to stay in. Is it not obvious to Greeks that Greece may indeed be better off jettisoning itself from the EU? To have a hope of reflating the Greek economy, austerity should be abandoned, with taxes imposed at a reasonable level, to give the economy a chance to grow. That will clearly not occur by remaining part of the system that is strangling the economy.

An orderly unwinding of Greece's and Europe's debt is possible. If it could be done in the U.S., when a third of all savings and loans associations failed in the 1980s and 1990s, something similar can be done in Europe. Doing so will clearly be painful, and the European tax payer will undoubtedly be left holding much of the bag. But they are doing so now, with no end in sight. It is time to stare reality in the face, admit that the EU economic and financial experiment has been a failure, that the debt burden created by the EU is unsustainable, and that there is little point in delaying the inevitable.




Daniel Wagner is CEO of Country Risk Solutions and author of "Managing Country Risk", please see below for link to Amazon. For Country Risk Solutions' web site, please click here.

You can follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt


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