Most days, the lead article on every financial news website is a six-year-old story about whether Greece is going to leave the Eurozone or require more loans from other European countries to stay there.
Today, European banks own almost no Greek debt, so the chances are slim that a Greek exit or default would cause a Lehman Brothers type of crisis where the banking system freezes up and the world goes into a recession. (The previous two bailouts allowed European banks to sell their Greek bonds.)
Greece’s Government Debt
The biggest Greek debt-holders now are Eurozone governments (62 percent), the International Monetary Fund (10 percent), and the European Central Bank (8 percent). Of the 62 percent held by governments, Germany has the largest total exposure, France is second, and Italy is third. (However, Germany’s exposure is only 2.3% of its overall GDP.)
So you have to ask yourself, “Why does a country that, according to the IMF, is only the 44th largest economy in the world with a population about the same as Ohio—11 million people—still dominate the financial news?” It is because the Greek story is really about the survival of the euro.
Defining Moment for the Euro?
British economist Charles Goodhart, an emeritus professor at the London School of Economics and former advisor to the Bank of England, said in 2004, “The defining moment for the Eurozone will arrive when a country is required by the treaty to take a deflationary fiscal action at a time when its economy is suffering worse stagnation.”
That moment has arrived. Before the euro, a country in the financial condition in which Greece put itself would have risked inflation by printing money, hoping a cheaper currency would allow that nation to export its way out of its problems.
Because Greece no longer controls its money, its only way to get competitive is through massive unemployment and pushing down wages, with the hope that lower wages will increase exports. Twenty-five percent unemployment, however, is incompatible with democracy—as unemployed and underemployed voters demand jobs from their elected politicians.
The Greece dilemma of needing money but being unable to create it goes to the core of the euro. The Greek economy needs money, but the European Central Bank, not the Greek government or Greek Central Bank (their Federal Reserve), creates Greece’s money.
Banks in Greece, like banks all over the world, can create money by making loans, but that money can easily be moved to banks in other Eurozone countries. Moreover, that is precisely what is happening. Wealthy individuals and companies in Greece are moving their bank deposits to financial institutions in France and Germany; that way, they are protected if Greece defaults or leaves the euro, thus creating a potential moneymaking opportunity for themselves. If Greece exits the Eurozone, its new currency—most likely the drachma—will be cheaper than the euro, and any money sitting in euros in German and French banks can move back into Greece and buy more than it could have before.
Control of Money
Why should European countries continue to lend money to Greece if that money is merely going to end up in banks in Germany and France? Why don’t the strong countries just toss Greece out of the Eurozone? If Greece departs, the other nations with high debt levels, the so-called PIGS—Portugal, Italy, Greece (who might already be out) and Spain—eject Ireland from the Eurozone as well, then we might see what Greece recognizes today: if you don’t control your money, you lose control of your country.
The strong countries have a lot invested in the euro. If other countries besides Greece leave the Eurozone, then German and French citizens might end up with a great T-shirt: “I Survived the Euro Crisis,” or something like that. But they won’t get what they really wanted: a reserve currency that competes with the U.S. dollar.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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