Wednesday, December 31, 2014

Greece is Back in the News

The patchwork of loan guarantees provided by the EU is falling apart. Greece will be the first to go, but ultimately even mighty Germany will be unable to avoid drowning in sovereign debt.  None of the countries in Europe are growing GDP, but all are growing sovereign debt.  What was a crisis five years ago is something far, far worse today.

A default (full or partial) would have solved Greece's problems five years ago and insulated the Euro from trouble.  But, the constant refrain that the Euro cannot survive a Greek default has led to the current debacle.  When there is no way to pay debts, it is time for a "workout."  That time has long since passed for Greece.  Now, there is only political theater.

The interesting question is what will happen to Germany.  (Isn't that always the interesting question for Europe?).  German fiscal situation is now hopelessly intertwined with that of the European Union, which is not good.  The Germans have underwritten a massive amount of sovereign debt of its Euro brothers and sisters.  This won't end well -- for Germany, or for anyone else.

It is still possible, were there the political will, to begin a partial default of all of the Eurozone sovereign debt.  This would permit the Eurozone a restart and provide a strong motivation for economic reform.  It is unlikely that this will happen.  So, the future for Europe is economic stagnation, possibly for generations.  The pain from this economic stagnation afflicts mostly young folks and the economically disadvantaged, so don't expect the European elite to complain (or to reform bad policy).

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