Grexit: Two Sides Of The Drachma

JUN 15, 2015 @ 5:30 PM

Forbes

By Clem Chambers,CONTRIBUTOR

I wrote a few weeks ago that everyone should relax about a Grexit, where Greece leaves the European currency and gets its drachma back. I maintained Greece was small and its impact on Europe as a whole would be, in the medium term, negligible.

However, if Greece was bailed out in the extreme manner the Greek government was demanding, then the other heavily indebted countries like Spain, Portugal and even Italy, would vote in reneging left wing governments to disavow their debt. This would risk destroying the euro and Europe itself as such an economic revolt would be unsustainable.

Better to let a Grexit happen and use Greece as an example to the others that you can’t spend, spend, spend and then tear up the bill and get away with it by letting others pay.

So it was amazing to hear the Greek prime minister half agree with me. Alexis Tsipras argues that Greece is small and not a big deal within Europe in terms of scale and that if Europe couldn’t cope with the situation, countries like Spain, Portugal and Italy would spin out of control and the euro and Europe would fail.

It was almost a mirror of what I wrote; however, there was a key difference–his conclusion was exactly opposite to mine. He said if Europe couldn’t forgive Greece, disaster in Spain, Portugal and Italy would follow. If Europe could not cope with Greece it would also not be able to deal with the other countries when their problems reached emergency proportions.

I maintain the opposite; if Greece is bailed out, disaster will follow because the example would trigger a me-too reaction in Spain, Portugal and Italy where Syriza-alikes would cry it was their country’s turn at the trough.

These opposing stand points are the core of the whole argument.

The trouble for the Syriza government is, their argument doesn’t make sense. Spain is recovering strongly from its mire and Portugal and Italy are no longer sinking. Ireland has shaken off its problems, or at least feels it has. They do not need to follow Greece down the road to insolvency.

If Greece goes bust, Europe will tidy up the mess outside Greece and support Spain, Portugal and Italy and do whatever is necessary to bridge the shock. There will be no contagion. There will be no crisis in Madrid or Rome.

It is only Greece that hasn’t or can’t take its economic medicine. It is now the odd man out. If Greece defaults and returns to the drachma, there will be a couple of weeks of drama and a few big statements from the ECB about doing whatever it takes. There will also be statements of sadness from the rest of Europe and empty promises of aid,  but no euro-wide roof will be pulled down by Syriza’s Samson on the EU’s head.

Yet if Greece is forgiven and all the crazy entitlements keep rolling, why wouldn’t any country feeling the pinch, elect a free-money party to parasite off the northern European economic powerhouses?

Dole begets more dole.

While it’s agreed locally that it’s ‘fair’ for the poor to be subsidized by the rich, no one is going to swallow the poor countries of Europe arrogantly holding their hands out for some cross border ‘fairness.’

Europe does just that already, but it is done with stealth. If the average voter knew how much economic aid was transferred from the north to the south they would be shocked, but that’s economics for you, no one cares much about the numbers and ignorance is bliss, at least for the central planners.

If the southern countries, and for that matter some on Europe’s eastern flank, began to demand debt forgiveness as the price of euro and by implication the EU, the EU would be set on a road to disintegration.

This is not going to happen.

What will happen is, either Greece folds its bargaining hand in a way it can claim some kind of victory at home or it goes for a Grexit, which it can blame on everyone else but itself.

When you consider the path ahead from Syriza’s point of view, a Grexit looks more and more likely. Which path is likely to get it re-elected? Remember, Greece’s public sector was 30% of employment and even after the recent draconian cuts is still 20%.

While turkeys don’t vote for Christmas, the short sharp shock of a new drachma might be the best medicine in the end.

The economy could be flooded with inflationary cash and the economy would fizz with tourism and easy exports. The balance of payments would right themselves as imports would get expensive. It’s 1970s political economics and they were always good for boosting chances of re-election.

Yet the politicians will run the process right to the final seconds and if a Grexit happens there will be days of shock and awe and perhaps a buying opportunity for stocks and a chance perhaps to short the new drachma.

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Clem Chambers is the CEO of leading private investors Web site ADVFN.com and author of Be Rich, The Game in Wall Street and Letters to my Broker.