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…
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.
for The Daily Reckoning Australia
From the Archives…
The Physical Gold Market – From the Weak to the Strong
2012-05-18 – Greg Canavan
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2012-05-17 – Eric Fry
Why Greece Can’t Afford to Stay in the Euro
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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