Why the European Community Cannot Afford to Let Greece Fail

Includes: EWG, FXE
by: Joseph L. Shaefer

Many have asked the question, “Will Europe be forced to bail out Greece?” I would answer that Europe is not forced to bail out Greece. The European Union (EU) however, if it wants to maintain the fiction that its mandates have done anything more than allow freer trade which has benefitted the economically-strong nations at its center, and the same currency (for currency zone partners) which has benefitted the weaker nations along the periphery, must act decisively.

Otherwise, Greece effectively becomes the child saying, “the Emperor has no clothes.” It is Greece, of course, that has brought this on themselves by years of profligate spending and underfunded socialist programs. Without a bailout from the EC, Greece will likely default on its sovereign debt.

And at that point, it is less about Greece than it is about the EC – which would face a financial meltdown. Greece, even after it was determined to have falsified statistics to qualify for euro membership, enjoyed an implied strength on the basis of the Bundesbank-driven euro, that allowed it to borrow more cheaply than its own economy would indicate. And borrow it did. Now the time has come to pay the piper.

Similar to the logic or illogic of the US TARP bailout, the economically-strongest EU nations, especially Germany, might like to let Greece fail, but they must consider the implications of that action as Too Big to (Allow Them to) Fail. It might be the most prudent course of action – motivating other ne’er-do-well EU nations to budget for higher borrowing costs and take responsibility for their own actions. But Greece would not be the only defaulting nation, merely the first domino to fall… It is Germany and the other strong nations’ sad duty to prevent the first domino from falling and, by extension, all the others.

The only way nations like France and Germany can hope to compete with the US, China, India, Russia, Brazil et al is via a powerful trading bloc. If Greece falls, the EU is suspect. If the EU is suspect, Europe is irrelevant as a major player in world trade and, by extension, world politics. The EU cannot afford to let Greece fail unless it is willing to see the euro plunge in value and the EU fail to be seen as a global force with an economic agenda and a political relevance.

The only question in my mind is how this will be accomplished. My guess is that the European Central Bank (ECB), derided by some as merely an extension of the Bundesbank, will effectively become one and the same in fact as well as in conspiracy theory. Brussels may remain the administrative and regulatory capital of the EC but the real power will have to be recognized as where it has always resided – in Berlin. As a result of this and other quiet bailouts, I see Germany running the fiscal policies of member states, particularly those who have demonstrated they are incapable of doing so themselves.

If the EC is to continue to exist, the fiction that it is some sort of democracy where all member nations are equal in prestige, resources and opportunity must finally die an overdue death. Even in the USA, some states are simply more blessed with resources, are better managed, and are more powerful than others. That is the future my analysis leads me to conclude is in store for the EC. It may be troubling to many, but it at least recognizes the reality of the current – and future – situation.

Author's Disclosure: There are no securities mentioned in this article. The implications of the current EC decision, however, may affect ALL securities!

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