A Hard Dose of Medicine for the Greek Economy

Hope springs eternal in the human breast;
Man never is, but always to be blest:
The soul, uneasy and confin’d from home,
Rests and expatiates in a life to come.

– Alexander Pope, ‘An Essay on Man’

Hope does indeed spring eternal in the human breast. Overseas markets looked ugly last night. Europe got off to a bad start and it just got worse from there. Equities fell around 2.5%. But after Europe closed, out came the rumours…the European Council had convened to come up with some ‘solution’ to the Greek debt crisis.

It was just that, a rumour. And even if it was true, it is truly hopeful to even remotely believe that these imbecilic eurocrats could find a solution to anything, let alone a dysfunctional monetary union built on a flawed concept.

We watched Insight on SBS the other night. The Greek crisis was the topic up for debate. It was a microcosm of what’s happening in Europe. The studio audience were mostly Australians of Greek heritage. There were a few Germans too. And via satellite Greek politicians on either side of the political spectrum slugged it out. Everyone had an opinion, no one agreed on the ‘solution’.

The problem is that everyone has an agenda. There is a fear that pervades many Greeks. It’s a fear of going back to the drachma and going back in time, when life was perhaps more uncertain and violent than what it is now.

Consequently, there was much doomsday talk about Greece exiting the euro and returning to the drachma. Hyperinflation, soaring unemployment, rioting and killing in the streets. But this is not pre-ordained. A return to the drachma can be Greece’s saviour as much as it might be a portent of societal breakdown.

But that’s not the narrative the Greeks or the EU elite are running with at the moment. We can’t help but think that the recent talk about preparing for a return to the drachma is designed to scare the bejesus out of the Greek people. The aim is to get them to reject the protest vote registered at the last election and move back to the political mainstream.

The Greeks want to keep the euro but reject austerity…two mutually exclusive desires. The German leaders (and the rest of Europe’s elite/banking class) also want Greece to remain. Not out of any benevolence towards the Greek people, but purely to avert the threat of contagion and euro breakdown that a disorderly Greek departure would bring.

But they want Greece to take their medicine. And that medicine is deflation. It means bringing the general price level down (most notably wages) to improve competitiveness. In theory, success here would see Greece balance its accounts and produce as much as it consumes. In theory…

Greece Balance of Trade

While it’s improved over the past few years, as you can see from the chart Greece still runs a hefty trade deficit. In 2011, it came in at 21 billion euros. That’s more than 10% of GDP. The Greek’s have gone through a lot for not much reward.

Long term austerity is hard to implement in a democracy. That’s why we reckon the rhetoric about an exit is on the rise. Scare the people into doing as they’re told. Take your medicine and shut up, or, alternatively, have your drachma and go…see if we care.

While this brinkmanship lasts, you can only expect increasing market volatility…laced with the odd hope-fused rumour and rally, which eventually fades into reality.


Greg Canavan
for Markets and Money

From the Archives…

The Physical Gold Market – From the Weak to the Strong
2012-05-18 – Greg Canavan

Why JP Morgan is Playing the Same Old Rigged Game
2012-05-17 – Eric Fry

Why Greece Can’t Afford to Stay in the Euro
2012-05-16 – Dan Denning

A Big Oops at JP Morgan!
2012-05-15 – Dan Amoss

Preparing For China’s Growth Slowdown With The ‘Energy Hub’ Portfolio
2012-04-14 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "A Hard Dose of Medicine for the Greek Economy"

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truth and integrity
When are California, Colorado. Illinois, Kentucky, Michigan, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina and Washington going to succeed from the United States because of their high debt levels. We have had the great empires Egypt, Assyria, Greece, Italy, Britain the US that have divided and conquered, and been conquered; yet today remain much as they once were. So why are the doomsdayers talking up destruction of Greece when the world was supposed to end on 20 may 2012. Is it because they believe in the Christian God? or because they bred Socrates, Plato,… Read more »

What will happen when America (where Benny’s printing press makes money out of thin air) cannot pay its debts?


It is ironic that America has most to fear from a recovery, not a continuance of the current economic turmoil. The more volatility, the more that people will buy into the “safe haven” of US treasuries and the longer the US can borrow at bugger all interest and keep going.

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