Guest Post: Jerry Goldstein is sure of a Greek default, cannot see the eurozone breaking up but can see no way out of the mire either

12/09/2011 by

GUEST POST by Jerry Goldstein, ex City banker and regular correspondent of this blog

I see the probability of Greece defaulting at 1, on a scale of zero to one. But I do not necessarily think this is sufficient to cause a breakup of the eurozone. Whilst a Greek default will cause volatility to spike yet more, I think that such an event is pretty much priced in already.

I was impressed by the logic of the UBS report on the costs to the eurozone of breaking up, relative to those of keeping it together. We have entered so deeply into black swan territory that just about anything could happen. Nevertheless, I do not see a unilateral withdrawal of Germany, the disappearance of the euro, or Spain or Italy defaulting. Having said that, my PhD supervisor at Yale (I hasten to add I never wrote my dissertation) who was a German called Hajo Holborn, and one of the finest of his generation, wrote a little book called “The Political Collapse of Europe” to describe the period 1914 to 1939. I believe we are going through another period of political and economic collapse in which democracy is failing, and I include the US in that as well.

More broadly speaking, I firmly believe Marx was wrong in ascribing primacy to economic life. I think it’s pretty easy to prove politics rules, and what worries me is precisely that, whilst we have been through a period of near financial collapse, which we never really exited from it, there is a political collapse which together with the financial and economic crisis, will tip us into unknown, deeply unpleasant territory.

The secular consequences of such enormous rates of unemployment, especially amongst the young and the long term unemployed, will take maybe more than a generation to work through, and that is probably the most worrying aspect of this mess.

I’ve been through 4-5 major financial crises and downturns in my 45 years as a banker (and ex banker), and they could all be described as basically deriving from unsustainable mispricings or relative levels  in the foreign exchange markets, extreme anomalies in equity or bond prices, stemming from trade flows, irrational exuberance, or loose money supply followed by tightening by central banks (a la Volker in 1980). In  any case, they were pretty easy to understand and the corrections were pretty simple, even if extreme.

This is the first time in my career that I have seen a crisis stemming from a complete collapse of faith in our political institutions, parliaments, leaders, media, financial systems, and relative social equities. I simply see no “fix” in the sense that previous crises were fixed or ameliorated.

So I am profoundly pessimistic.

But for the eurozone to break up, we would really, I think, have to be in Weimar territory, and I do not think we are there yet. However, given that we have nothing but mediocracies in our political life, even if a Roosevelt or Churchill appeared, I doubt that any electorate would follow them. I cannot see what the way out is.

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