A Collection of Mildly Interesting Thoughts on the Eurozone
I am conscious that it has been a relatively long time until I made the effort to write up a blog and, for that, I apologise – I’m working a somewhat lengthy week! The topic of today’s discussion is the Eurozone crisis and I will be focusing in on the enormity of France’s lending power, as well as bail-out packages and the implications of a Greek default. As I’m sure all will agree, this is a highly controversial and sensitive area that is difficult to summarise in a single blog post; I will try my best to make this read both informative and interesting.
I’ll start by highlighting an incredibly key, often overlooked, fundamental principle with which the Eurozone is currently plagued; a point which, for me, was immediately intriguing but equally shocking and perhaps even explanatory of a number of questions often asked about the Euro crisis. This poignant point is the idea that there is no functioning mechanism within the Maastricht Treaty, and as a result within the Eurozone, for any member state to opt out of using the single currency. Now, I understand that this opens and incredibly complex network of questions and situations, all of which deserve an answer, however I am limited in both ability and the space with which to write before individuals decide to close the webpage out of shere boredom – I shall thus hone on the bits that I find most interest. The first point of interest is the uneasy situation by which there is no scenario whereby Greece, often regarded as the Euro’s biggest anchor, can simply return to the drachmar and remove itself as a weighty burden on the Eurozone; this is a near impossible solution. As a result of this, therefore, we see the continuous attempts of the German and French, to name a few, governments to prop up the Greek economy to avoid, or even just delay, a forthcoming default.
The intensifying worry and concern of not only Eurozone member states, but the wider global economy, is undoubtedly justified seeing as some of the World’s leading economic powers have so much resting on the success of the Euro, that they cannot afford to see its demise. Some people are surprised to learn that Greece’s debt is larger to France than it is to Germany, at a proportionately (to the size of Greece’s economy) whopping €41.4bn – which is absolutely relevant if you take a look at the fingers that France has in the pies of other Eurozone member states: €309bn to Italy; €112bn to Spain; €23.8bn to Ireland. To me it’s relatively safe to say that if the German economy won’t collapse as a result of the Greek default, then France’s certainly will. Picture the scenario: France has €41.4bn locked up in Greek debt, Greek banks collapse as a result of a Greek default, France loses €41.4bn of lent money in the blink of an eye, other nations lose vast amounts too (particularly unsettling amongst the PIIGS), the French banks begin to struggle – perhaps even a few go bust. My point: the loss of Greece would be a major blow to France’s economic prowess, and my fear is that the depicted scenario is the lightest possible situation. France relies heavily on the success of the Euro, as does Germany, as they have so much tied up in the currency that a move away from the single currency would see catastrophic losses in bought debt for major European banks – not a pleasant situation at all.
This then leads me on to talk about the level of conviction behind the bail-out packages currently in motion with Greece – would Germany, or France, really allow for Greece to not see its bail-out package? Do their threats actually carry significance? The main condition for Greece to receive its cash injection from the big Euro players is to stick to the planned austerity programme which, as many may be aware, is strongly opposed by a great many protestors within Greece. However, if Greece failed to meet the requirements, causing the bailout package to be withheld, causing a default in Greek banks, resulting in significant damage to other Eurozone economies. Would this really be allowed to occur? Is this simply a facade put on as an intimidation ploy? Would the Greek government ever take the risk? It’s an interesting area to ponder on – I, of course, can’t give the answer! Further, don’t forget that if Greece was ever pushed into moving back to the drachmar, what would happen with Greece’s currency? Reinvestment would cause high levels of inflation, Greeks would save in German banks to get a better exchange deal (the so called ‘bank run’), and burning currency is renowned as an absolute no-go in all areas of the World. Another thought-teaser!
I’ll speak finally about the reasons behind what may appear to be a somewhat profligate or poorly thought through investment strategy, particularly, as we’ve seen, by the French. As we all know, Germany has a prosperous economy, dominating Europe and a lot of the World with its economic strength, and this strength directly provides a notion that economists will call ‘confidence’. By this, I mean that if such a powerful economy, being Germany who have succeeded so greatly, has the faith to invest its own security in the Euro and even adopt the currency, surely there is very little that can go wrong? After all, even if it does, Germany has faith – so how bad can it be? This means that throughout the process of investment, a great deal more emotional intelligence than would typically be considered comfortable was used in the process of buying up debt – revolving centrally around this idea of confidence in the German economy outlined above. When buying debt, which is what Germany is doing a lot of now, the objective is to make relative gains (although we’re seeing examples of absolute gains within the Eurozone presently) and see a healthy return via interest – due to a significant lack of economic forsight and over-use of emotion (often not too healthy in economics) there is panic as to whether this may not be the case in the Eurozone.
I hope that this has been adequate in settling some of the appetites of individuals with a keen interest in Eurozone affairs, and will happily speak to anyway regarding the topic in more debt. Further, may I add, that my opinions are in no way attempting to undermine the intelligence of the mostly qualified economists in Europe.