Eurozone Descends into a Farce as "Grexit" Looms Large

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The elections on May 6 only made the Eurozone's problems even worse. The French and the Greeks have rejected sensible policies in favor of self-delusion.

Those elections, and the failure of Greece to form a government, have actually moved the Eurozone crisis one step further – from potential tragedy into a complete farce.

As investors, we can only watch horrified, knowing that a really bad outcome would seriously damage our own wealth.

But at this point, a Greek exit – or "Grexit" as it has come to be known – from the Eurozone would be the best thing that could happen.

Confusion Surrounds the "Grexit"

The Greek election produced a very confused result. But one thing was clear: the Greek electorate has decisively rejected the rescue plan the outgoing government had so painstakingly negotiated with the EU.

The previous ruling party's joint support declined to just 32% of the vote. That might be thought of as just retribution, since those parties produced Greece's appalling fiscal mess by lying for decades about the true position of Greece's public finances. (And let us not forget being abetted by Goldman Sachs in doing so).

However, the winners were not some new paragons of fiscal responsibility and free market government. They were anti-German Nazis (a peculiar combination when you think about it), communists and a truly unpleasant new leftist party, SYRIZA, led by the 37-year-old Alexis Tsipras.

SYRIZA's politics, in that one can fathom them, spell nothing but trouble.

They seem to take the Argentine approach to governance – repudiate all your international obligations, spend like mad on the public sector, run xenophobic campaigns against your creditors, whine for more money from international institutions and, no doubt, nationalize anything that might be worth money.

Tsipras also made very sure no government could be formed so new elections must now be held June 17– which SYRIZA is expected to win. Given the peculiar Greek electoral system, which gives 50 bonus seats to the winning party, Tsipras is likely to form the next government.

Yet if the EU authorities have any sense, they will refuse to negotiate with a Tsipras government and throw Greece out of the euro.

This would cause Greek living standards to halve, but would reintroduce the market into the Greek economy, allowing its viable sectors such as tourism to flourish at the new lower exchange rate.

If this had been done before Tsipras appeared, as I have repeatedly recommended, it would have caused about 6-9 months of chaos, after which recovery would take place and Greek unemployment would rapidly decline.

With Tsipras, the government will instead become bloated beyond belief.

Billions upon billions will be stolen, unemployment will stay high (although state make-work jobs and false statistics will hide this) and Greece will decline into genuine poverty– since unlike Argentina it has few natural resources.

The Greeks will have brought this misery on themselves, but whereas a short sharp shock from a free exchange rate would do them good, and make them happier in the long run (since they would have productive jobs) one can only pity their miserable post-Tsipras existence.

More Eurozone Rubbish

The other possibility, however, is that the Eurozone authorities will mutter unhappily about their "democratic mandate" and allow Tsipras to neglect Greece's commitments to reform, while providing yet more money.

They will rationalize this by claiming that the cost of another Greek bailout is less than that of the breakup of the euro. That's rubbish, for two reasons.

First, it's a horrible precedent; every dozy populist in southern Europe will see the European Central Bank and German taxpayers as endless slush funds for their witless schemes, while promises of reform and cutbacks will be universally evaded.

Second, the cost of a Grexit from the euro just isn't that great.

We now know that the country has been run far worse than any other euro member. Italy has much smaller budget deficits, while Portugal, Ireland and Spain are making major efforts to clean up their act, with some signs of success.

Making an example of Greece, while providing loans where necessary to ring-fence the much better governments of Ireland, Portugal, Spain and Italy is still a viable strategy, provided France (which is in worse shape than Spain and arguably Italy) co-operates.

With Greece descending into impoverished chaos, the clamor from other electorates for populist overspending would be greatly diminished. Even in Europe, the smack of firm government can be made to work!

France could be a problem. The new Socialist President Francois Hollande has claimed he wants to relax austerity. He has however appointed moderates to his cabinet, with the new Prime Minister Jean-Marc Ayrault setting an example by cutting the pay of all cabinet ministers by 30%.

Hollande has also appointed the moderate Pierre Moscovici as finance minister who has described himself as a member of the deficit-cutting "serious left". It suggests that France, at least, will not follow the Greek road to overspending.

Thus, if the Hollande government avoids repealing the limited reforms President Sarkozy had introduced (notably, increasing the retirement age from 60 to 62) and does not increase income tax to 75% as he promised in the election campaign France will probably avoid serious trouble.

On balance therefore, we can expect a few weeks of turmoil followed by a Greek exit from the euro and relatively calm sailing thereafter, PROVIDED the Eurozone authorities hang tough.

Of course, that is not generally in their nature, but one must hope.

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  1. Jack | May 18, 2012

    As Greece was occupied during the Crimean and Cold wars, we must displace the current residents with Albanians (Kosovar Style) to keep them from giving the soviets access tot he straits.

    • ELEFTHERIA | May 18, 2012

      you should be ashamed

    • dimi | May 19, 2012

      "we must displace the current residents "…..we=the dictators
      displace…do you know the word "democracy"?

    • Nick | May 21, 2012

      Dear Jack(ass),
      from your comment, I assume that History is not your “Forte”. It’s never too late to open up a book and learn something. For the time being you should know that Greece, during the Crimean war, was an independent country which had nothing to do with that war, has been member of the NATO since 1952 and the “current residents” are here since the beginning of Time. And exactly who are YOU that must displace the natives with Albanians and how are YOU going to do that?

      Suggestion: The next time you come up with an idea like this, put your head under the running tap before you publish your bullshit.

  2. Robert in Canada | May 18, 2012

    It's almost unbelievable that anyone in a developed country still promotes the left wing policies that have destroyed Greece and other countries.

    Yet there are millions of them in left wing parties in Canada, the USA, the UK and elsewhere: un-informed, mis-informed, delusional, and brain-washed.

    They are like millions of zombies stumbling toward the edge of a cliff. But so blissful in their ignorance of what's going to happen next.

    Like the millions of Greek zombies who demanded and got things that destroyed their economy, and now fiercely demanding that someone else pay for it.

    • Dave Allison | May 18, 2012

      You are losing right now, rober in canada. The Capitalists have overreached and will now pay the price. Nah, Nah, Nah, Nah Nah! bond-holders and stock holders will now pay the price of greed as the public regains control of the world governments and economies.

    • John Charles Brown | May 19, 2012

      Robert,
      Yes, Greece is truly frightening. But as a UK resident with 2.5 degrees, who has had continually to change jobs every 10 years or so as one or other company or institution collapsed or dumbed down, I have always looked with envy on the technical sector in France. They make their own TVs and video-recorders, railway engines and rolling stock, computers, nuclear power stations (which do seem to be safe), satellite launch vehicles, and design their own cars. None of this takes place in the UK any more. The French seem to do it by higher-than-average taxation, and government subsidies for technological companies.
      I left academia 15 years ago, and did quite well in a software company till it over-expanded and lost money, shedding 75% of its staff, 3 years ago. My UK government has absolutely no plan for how our economy or manufacturing sector is going to recover. Thankfully, I have a pension from lecturing, and will have a state pension (just, by the skin of my teeth) in 3 years.
      Meanwhile, I write high-tech programs at home and hope the market in these kinds of jobs might recover before I finally retire. What a waste, what a way to ruin a country !
      So I think there are good points in the socialist model. The obvious bad points are excessive benefits for no work in return, and waste spending unless you educate and train your civil service very well indeed, which the French seem to do, and which the British seem to have no idea about.

    • Makis | May 19, 2012

      Dear Robert
      First of all Greek "zombies" have not "demanded" anything from anyone.All loans were provided by the E.E,I.M.F and E.C.B after Greece was forced to sign a couple of memorandums that contained severe austerity measures on the one hand and with lawn shark interest rates on the other hand.Many european banks and international financial organizations (Deutsche Bank,Goldman Sachs and J.P.Morgan to name a few) made a lot of profit playing on Greece's back(the C.D.Ss game only resulted in several billions in profit).Don't be naive my dear Robert.All this was a well organised and implemented political and economic plan in order for some institutions to have the maximum gain.It just happened that Greece was the perfect victim at that time due to its high sovereign debt in relation to its GDP.If Greece had played its cards wisely,it could have been Ireland or Portugal.
      Secondly,the Greek "zombies" that destroyed their economy were not millions, but a few corrupted politicians.Millions are now the people that are suffering because of their actions.
      2,000 have commited suicide in the past 2 years,the unemployment rate is 25%,everyday you see new homeless people on the streets,30% of the population is now living below the edge of poverty….
      So dear Robert, just stop calling us zombies and try to understand that a proud nation that was brought to this desparate situation,will try anything to get out of it,even if this includes voting a left wing party that promisses exactly that.You see dear Robert,we are no longer at the edge of the cliff.We have fallen over it,we have seen that below is only the abyss and, on our free fall, we are reaching out trying to find something to hold on so that we wont die from the fall.
      Well, if we could not manage and eventually die…then you could call us zombies!!!

      • dimi | May 22, 2012

        i am with you..good work

      • EVA | May 27, 2012

        Totally agree with Makis.BESIDES, IT IS CLEARLY WRITTEN IN THE WORLD'S HISTORY.
        WHO HAVE BEEN THE ZOMBIES THROUGH CENTURIES TILL OUR DAYS.NOT GREEKS ABSOLUTELY .

  3. john | May 18, 2012

    We need to get out of NATO to save ourselves. If the USA TRIES to save the EURO, it can cause a serious depression here at home since the EUROPEAN BANKING is four times larger than the USA'S save ourselves first, then worry about the rest of the world. THE DOMINOES ARE ALL LINED UP. get out of the way. FIRST GREECE & THEN FRANCE.

  4. Dad | May 18, 2012

    You have captured my view exactly except with regard to France. Greece is an unimportant country/economy, release this country from the Euro – the impact (to the Euro zone) over the longer term should be nominal. But of course this means Greece is doomed. France on the other hand, just has that uncanny ability to make things that shouldn't work, work for them.

  5. Benjamin | May 18, 2012

    If Greece's self-imposed plight hasn't affected our quasi-Socialist "leadership" in the United States yet, I don't know what will. Insanity is a hard cycle to break.

  6. Retirefund | May 18, 2012

    The whole scenario speaks volumes for investors who favor physical gold and silver holdings. As Greeks empty their banks of Euro's, how long will it take for the Portugese, Spanish and yes, even the French, to catch that fever and start a rush on their own banks.

    Got gold anyone? Maybe you should!!

  7. Ed the Grocer | May 18, 2012

    First must be an understanding that in a modern society the influence of automation and international trade will cause a higher level of unemployment. As stated, Greece does not have a lot of resources outside of tourism and food. Both of their major industries also require modern inputs and accompanying modern costs. The desired ( paying ) tourists are not camping on the beach catching fish for supper. It means that those industries must remain Euro based paid services. Think; roads, transport, communications, banks, clean food, clean water, modern hotels, etc.. A failure to maintain clean and safe services will quickly drive the entire customer base up the coast to Spain, Portugal and Italy. It will also drive wealthy locals away. Secondly, no matter what the politics, the new Greece will have to live within its means. That means that the government services must live within the collected taxes. It is unlikely that there will be a new round of loans to the government. So the only successful scenario must have continuing good level of government services paid for with low wages. There is of course the other possibility. Chaos and poverty. It wouldn't be the first time. It is just getting closer to home.

  8. Robert Brink | May 19, 2012

    Mr. Hutchinson's appraisal of the situation seemed insightful — until he mentioned that Hollande's plan to raise the income tax rate in France to 75 percent would be harmful. He didn't even say this would apply only to the rich. Seems these investment adviser types just can't stand the idea of making the rich pay for the vast benefits they've derived from society, even though exacting higher taxes from the rich has shown over and over to help economies. These guys, by their nature, are heavily biased for the wealthy.

  9. Sotiria Kalotantanou | May 21, 2012

    "Yet if the EU authorities have any sense, they will refuse to negotiate with a Tsipras government and throw Greece out of the euro."????
    Obviously Mr Martin Hutchinson, your knoledge about european reforms and treaties is at least inadequate. Who gives the right to EU authorities to throw Greece out of eurozone??
    Take a look to the follow link (http://en.wikipedia.org/wiki/Withdrawal_from_the_European_Union)
    When for so many years banks routinely approved & even ' pushed ' unqualified mortgage buyers,when they even signed off on buyers income reports knowing they were fake,
    Mortgage brokers were having a field day promoting 'this property will appreciate twice its value in less than two years" they seduced the ignorant & the stupid, and the Banks backed them up..What about when the Germans got rich selling their goods and making risky loans to finance the Ponzi scheme..So which "authority" has the "sense" to throw…sense???You probably must to say NONSENSE…As a Global Investing Strategist, you should have a wider knowledge, because knowing less is worse than knowing nothing…

  10. arblaster | May 21, 2012

    As someone who lives in Europe, let me say we are heartily sick of the Greeks, and the way politicians from various countries in the EU are all too willing to lend them money. The got into the Eurozone by lying about their finances. The should be instantly kicked out of the Eurozone. In fact, they should be kicked out of the European Union, before economic refugees come pouring over the borders. There are a number of European countries who are in economic difficulties. No one is complaining about the Irish or the Portuguese or the Spanish. Only the Greeks, who will not work, and the French, who are arrogant and want to force their cockamamy Napoleonic schemes on the rest of us. The rest of Europe should unhitch the Greeks and the French from the European Union, before they bring Europe to war.

  11. dimi | May 22, 2012

    Dear Martin, is there any difference between a Grexit and a Gerxit?
    None, not even a single letter.
    Therefore, a Gerxit will follow the Grexit.
    Do you know how many billions of these 130 have come to Greece? Only 17.
    I believe that you don't think that Germany will "help" all the other European countries.
    please see.. http://www.youtube.com/watch?v=rpxVMRNSzNA
    thank you.

  12. Yan Maythorn | May 23, 2012

    Left versus Right Delusion
    Shakespeare knew it 400 years ago: there is much more between Heaven and Earth than what meets the Eye.
    In Politics there is not just Left and Right.
    Politics and Reality are not linear 1-dimensional concepts.
    There is also Up and Down. Rich and Poor.
    Forward and Backward. Liberal versus Conservative.
    In and Out. Trendy versus OldFashioned.
    Before and After. History versus Future.
    Politics has to get rid of 1-dimensional thinking and start imaging the World in its full 4-dimensional complexity. Just as Albert Einstein would have hoped for.
    Most Humans are not capable of thinking 4-dimensionally. Politicians and bank(st)ers must be able to do this. Otherwise there is just Katastrofee ahead for Mankind.
    Yours faithfully,
    Yan Maythorn

  13. Paul | May 25, 2012

    The Greeks are lazy liars and deserve all thats coming to them. They have used other peoples money to prop up their useless governments and underproductive economy. They covered up their fiscal position with less than truthful accounting as to level of the Greek state debt and now the truth has come out.

    Greeks dont like paying taxes- its no wonder they are broke…..Greeces authorities have not persued tax obligations on the greater greek population resulting in huge government debt being raked up. Its too easy to avoid paying taxes in Greece -and so people don't pay taxes

    I see Greek comments about democracy and fairness yet the greeks are themselves guilty of carrying less than savoury actions. They have stolen the Macedonian peoples land and persecuted them on and off (for a hundred years now) when not carrying out cultural genocide against them.

    Greece your time has come to pay the piper and you are getting your just deserts -your people sit in cafe's all day and drink coffee instead of working. The Germans have had enough of this indolence and have said enough is enough…..and they KNOW the truth as do I,

    including the situation with the Slavic speaking people in the north of your(?) country………….

  14. apr | September 18, 2012

    Everything is very open with a clear clarification of
    the challenges. It was definitely informative. Your website is useful.
    Thanks for sharing!

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