I’m currently writing this whilst having CNBC on mute which is devoting it’s coverage to the Bank of England’s monthly interest rate decision.
The decision is a forgone conclusion; rates will stay the same, and in fact it’s fairly certain they will do so until 2016 so it’s not “must see TV”.
The show however is trying its best to generate some heat with talking heads outlining all the different factors in play, possible dissension between FOMC members etc etc.
Blah, blah, blah, nothing’s going to change!
In the same vein
The reason for writing though is to comment on the Greek (tragedy) situation post the election victory of Syriza, and to ask whether there is actually a solution already roughly mapped out or if we really are watching a competitive political game of high stakes poker?
Syriza gained power on the promise that they would renegotiate the terms of the country’s bailout because it faces unrelenting cuts and restrictions with no real hope of reaching an end point; the size of their debts and the cost of servicing that debt are simply too great.
They are not wrong about this. One can correctly argue that they dug themselves this hole with a heady mix of corruption and profligacy so they now should reap what they sowed, but can it also be argued that’s the same logic as saying to an accident victim that they won’t receive any rehab or pain killers because their negligence caused it?
The present situation is fascinating in that there are a number of competing views and ways to analyse the problem, all of which have validity.
- Mark Carney recently made a speech in which he suggested that the EU would need to accept that there had to be some transfer of wealth from the richer countries to the poorer. This is a central issue; if the Union is to be more than a trading block with a single currency then the likes of Germany are going to be required to share some of their wealth. The United States operates at a state level (the 50) and a Federal level (the central government). Both raise revenues, the Federal redistributes nationally, not back to the states in the proportions they pay in. This really doesn’t happen with the EU.
- Both President Obama and David Cameron have stated that Greece is currently locked into an untenable position.
- There are elections coming in several EU countries, most importantly Spain, and if the EU caves to Greece then it’s not hard to imagine that the Spanish will vote for their version of Syriza and demand similar concessions (also Portugal, Ireland, maybe even France). So do the Germans feel they need to hold the line for fear of bailout contagion?
- The German electorate will not be in favour of bailouts; they went through a hard decade themselves to fund the reintegration of East Germany, and they value discipline and parsimony so they are definitely in the “you dug this hole” camp.
- The argument for Germany being looser with the purse strings is that they have made out like bandits from the euro being far lower in value than a Deutschmark would have been. Germany exports a lot, the Euro has helped enormously as has the rest of Europe buying its goods.
- The Greek electorate does not want to leave the EU or return to the Drachma.
There may well be an outline agreement in place already that says debts can be reconfigured so that interest and capital is geared to growth of their GDP. This in effect means that Greece only pays when the economy is growing and only from the growth it achieves.
This possibly puts a stop to their crushing sense of hopeless struggle and incentivises meaningful changes to create efficiencies and increased revenues (such an agreement will surely come with EU stipulated reforms).
The EU will want to avoid any outright default (whilst Greece remains a member) and this is helped by the actions taken from 2010 when the crisis first surfaced. Now only about £40 billion of Greeks total debts are in the market, the rest is held by the ECB or other governments. It would not be a surprise to see the market debt left untouched and the ECB / Government debt rewritten along the lines of the GDP growth idea as above.
This is the name of a Japanese stylised form of play where the outcome is known from the start but choreographed argument and disagreement is played out before the predetermined outcome is finally reached.
Is this what we are seeing?
Will Germany play the bad cop and quietly agree revisions?
Or do they actually fundamentally believe the Greeks’ self-inflicted torment to be their own problem and one they either face full on or by themselves outside the EU?
Are we watching Kabuki or Texas Hold’em??
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