Markets rallied on Tuesday, shrugging off news from Greece and the Eurozone. Turmoil in the Hellenic Republic continues though, and it will have long-term implications. Some new developments have happened.
First, Greek Prime Minister George Papandreou pinned some of the blame of the crisis—on the EU! The EU does have its share of problems, but it is not the responsibility of Germany and France to take charge of decades-long fiscal mismanagement in Greece. From my perspective, either Papandreou is putting out statements like this to appease internal political factions in Greece, or he is out of touch with the economic reality.
In all fairness, the crisis is not entirely his government’s fault, as frankly no Greek government since World War II has shown much fiscal discipline–or at the very least a drive to create a climate that attracts investment. The previous conservative government was brought down in the polls partly due to ineptitude of handling riots in 2008 that took days to restore order. Complicating the matter was that Greek police are forbidden from going onto a university campus as a reaction against the Greek military dictatorship in the 1960s and 1970s. This restriction gave rioters and criminals a place to avoid capture.
The Greek newspaper Kathimerini has been ripping on the PM’s government in the editorial pages for over a solid week now. One columnist went as far as to call Papandreou a “complete failure.”
What this means
From a distance, these developments may be almost comical to watch, but the political uncertainty that they create puts a number of things into question: 1) can Papandreou’s government garner the political will to push for fiscal austerity, especially considering he comes from a traditionally socialist party, and 2) will France and Germany be less eager to extend a bailout, thinking that it could be squandered on an ineffective government?
The first point may indeed be possible. History has shown that major political maneuvers have sometimes been easier to accomplish when pushed by a party traditionally associated with opposing them. Examples in the United States would be President Clinton passing welfare reform and NAFTA, or President Nixon opening relations with China during the Cold War. However, Clinton and Nixon were not facing immediate crises when those events took place.
The second point of whether or not other European nations will be willing to make a bailout is now less certain. I said previously that a bailout is becoming more and more likely, but political will for this in Germany is not as strong as I had anticipated. A recent poll shows that “a majority of Germans want debt-ridden Greece to be thrown out of the euro zone [sic] if necessary and more than two-thirds oppose handing Athens billions of euros in credit.”
Political economics is always messy. I had though that we had more clarity on Greece last week when the prices on Greek sovereign debt credit default swaps started dropping. That was not the case.
Until we have a definitive answer on Greek plans or EU/IMF plans, I maintain my position that European sovereign debt should be avoided entirely. The Euro will also likely trade depressed for some time. I would also avoid buying US Dollars on a slump in the Euro, since there may be a short-term flight to quality from the Euro, but the US has its share of weakness as well.