Interviewed by FXstreet.com on Grexit…

31/05/2012 by

  One year ago we heard for the very first time about rumors of Greece leaving the Eurozone. What has changed in one year to go from considering it just gossip to taking it as a real fact?

Something very simple: at long last the truth bubbled up to the surface of the murky pond of subterfuge that is Europe’s response to the Crisis.

In May 2010 Europe decided to pile onto the insolvent Greek state the largest loan in history on condition that Greece would reduce its national income (from which new and old loans would have to be repaid).

A year later, in 2011, it became clear that the policy was simply delaying the inevitable default. It was at that time that rumours of a Greek expulsion were first uttered. Europe’s response was to repeat its error: with one hand to write down around  95 billion of Greek debt while with the other adding another  130 billion to the same pile of debt, again on condition of further diminutions in Greece’s national income (also known as ‘austerity’)!

It only took a few months for the world to realise that this was simply a form of organised madness, and that the Greek state’s insolvency was a growing black hole. Naturally, the rumours of a Greek exit turned into a raucous cacophony. Of course, it is all smoke and mirrors. Again! For if Europe were ready for a Grexit, as per the latest neologism, there would be no need for rumour-mongering: Greece would have been forced out overnight and without much fanfare or early warning. Alas, it is not that simple. The Eurozone is simply not up to it, despite the threats and protestations of assorted Frankfurt-based bankers. And so the rumours of a Grexit get louder in a sad relection of Europe’s astonishing capacity for what I call reverse alchemy (i.e. beginning with gold and ending up with lead).

Would Greece’s departure from the single currency shake the integrity of the Eurozone to the point of its eventual break-up, or in the longer-term, even the integrity of the European Union itself?

Yes and yes. The lack of a constitutional (or Treaty-enabled) process for exiting the Eurozone has a solid logic behind it. The whole point of creating the common currency was to impress the markets that it is a permanent union that will guarantee huge losses to anyone bold enough to bet against its solidity. A single exit suffices to punch a hole through this perceived solidity. Like a tiny fault line on a mighty dam, a Greek exit will inevitably lead to the edifice’s collapse under the unstoppable forces of disintegration that will gain a toehold within that fault line. The moment Greece is pushed out two things will happen: a massive capital flight from Dublin, Lisbon, Madrid etc., followed by a reluctance of the ECB and Berlin to authorise unlimited liquidity to banks and states. This will mean the immediate bankruptcy of whole banking systems plus Italy and Spain. At that point, Germany will face a hideous dilemma: jeopardise the solvency of the German state (by committing a few trillions to the task of saving what is left of the Eurozone) or bailing itself out (i.e. Germany leaving the Eurozone). I have no doubt that it will choose the latter. And since this will mean tearing up a number of EU Treaties and Charters (including the ECB’s) the EU will, in essence, cease to exist. Our predicament is as simple as it is terrifying.

  A return to the drachma would help Greece decrease its debt load, but would also imply a series of risks for the country such as high inflation, mass unemployment, flight of capital, civil disorder. Do the advantages outweigh the disadvantages in your opinion?

They certainly do not! I keep repeating, especially to my American friends, that exiting the euro is not the same as cutting a peg (as Argentina did a decade ago) or exiting the Gold Standard (as Britain did in 1931, followed by the US a year later). The profound difference is that Argentina and Britain had their own currency and they simply severed its link to some exogenous hard currency – allowing it wisely to drift ‘south’ in order to restore competitiveness etc. Greece, Spain et al do not have a currency to devalue. We must do something that has never happened in history: Create a currency in order to devalue it! And since it takes months to create a currency, we are talking about driving countries that are already savaged by recession into an un-monetised state for months on end.

One only needs to state this to realise the immensity of the hardship it will create. Nevertheless, this is NOT an argument for staying the course specified for our countries by Europe’s powers-that-be. In fact, if we try to stay this irrational course, we shall be working (unwittingly) toward a disintegration of the Eurozone that is even faster than it need be. It is in this sense that I think that those who are worried by the prospect of a Eurozone disintegration should be seeking an immediate circuit-breaker like, for instance, a Greek ‘No’ to the next loan installment from the troika (until and unless there are new, workable, rational terms and conditions).

  Do you agree with Merrill Lynch analysts that if Greece left the Eurozone, the area’s GDP would decrease by at least 4%?

Yet again Merrill Lynch have put on display their incompetence with numbers, let alone concepts. Where on earth did they fish out that 4% from? Not only is it the wrong order of magnitude (for nothing less than 30% makes sense) but it demonstrates deep seated ignorance of Greece’s dismal macrodynamics (i.e. Greek GDP is already shrinking at an accelerating pace). It is clearly a number plucked out of nowhere by incompetent analysts for the benefit of hapless customers.

  What is your forecast for the future of Greece? What could happen within the next months under a social and political point of view?

There are too many unknownable unknowns (to quote Frank Knight) to allow a prediction. All I know is that something has to give. The social economy has imploded, circuits of credit have dissolved, companies are becoming insolvent even when efficient and potentially profitable (due to the death of credit), labour isn’t working, youth has lost its elan and forfeited its youthfulness. On the other hand, I simply refuse to believe that Greece will be allowed to leave the Eurozone, at least not until Germany et al decide to give the euro up.

So, this death dance is likely to continue until something gives. My desperate (and irrational) hope is that that ‘something’ will be Europe’s steadfast rejection of rational argument. For I have no doubt that this Crisis would be ended within a week or two, provided we Europeanise banks, debt (at least its Maastricht-compliant component) and investment. All we need is the nous and the will to do it.

  According to recent reports, a Greek Eurozone exit would not only threaten other European countries with contagion, but also hurt exporters and commodity producers such as China or Russia. Which non-European countries would feel the greatest damage in your opinion?

If my scenario above is right, a Grexit will precipitate a global, postmodern version of the 1930s. Come to think of it, the fragmentation of the Eurozone would result in a deep deflation, with a trebling of unemployment, east of the Rhine and north of the Alps (as the new Mark-zone will face a massive revaluation that loses it export markets in droves), with the rest of Europe plunged into a hellish stagflation (as both unemployment and inflation, following the reconstitution of deficit countries’ currencies). Given that Germany, Holland and the few remaining surplus Eurozone countries have not yet experienced the hardship of this Crisis, the new reality will affect those societies the worst.

  How well is the US prepared for such a possibility? And the rest of the world?

As well as a riverboat that is sailing on a calm Pacific before hit by an almighty storm. The US economy has been clinging on to anaemic growth for a year now. The tsunami that will be occasioned by a Eurozone disintegration will push the US over the edge. And with it, China’s faltering growth will come to a standstill with terrible effects on the BRICS, Australia, New Zealand and Canada. To put it bluntly, Europe is about to unleash global pain on the planet for a third time in a century. We, Europeans, should be deeply ashamed of ourselves!

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