It turns out, there is a pattern to these market crashes and screaming analysts on TV. They've mostly been about the looming crisis in the 17 member Euro zone. Besides baffling me at times, it also makes me a bit upset on seeing this same pattern keeping on repeating due to reasons as quaint as the Greeks asking for political leeway for making the latest round of cuts to get their next bailout fund of a few billion Euros to the fear of what might happen if the Spanish worker's union call a strike to protest against a small change in their country's horrible labour laws. While analysts and pundits have an opinion on what might happen if the strike lasted too long or what if the Greeks opted for a referendum on some trivial issue, it seems no one has an answer to address the main problem - whether the Euro zone will survive as it is today or eventually break up into some washed up, has been currency union of a few northern European rich countries.
Most analysts, the media and even most governments shudder to even think much less discuss the possibility for an exit of Greece (or by extension Portugal, Ireland and Spain) from the euro zone. The reason for this fear is the perceived chaos resulting from such an exit.
In the event of an exit of even one country from the euro zone I agree, there would be chaos. But the thing to ponder about is whether the chaos and breakup will bring result into a stronger euro zone in the future or herald in a European "financial nuclear winter" that will throw the continent into a decade long depression and the rest of the world into a more severe version of the Great Recession.
Lets be clear on one thing before I get to the core of this post. The trillions of euros worth of financial engineering being tried by the European Central Bank (ECB) to recapitalize European banks and the creation of a European "Super Fund" of roughly Euro 500 Billion to act as a financial firewall in case of a severe financial storm is hardly enough to defend European finance ,if indeed a member country like Greece decided to (or forcibly had to) exit the euro.
As a self proclaimed amateur economist, I have come up with my own little scenario of what it would be like if Greece did indeed exit the euro zone.
- A surprise announcement is made by the Greek government over a weekend about its decision to exit the euro starting the coming Monday.
- A new rate of exchange is declared of the new Greek drachma against the euro. The new exchange rate is devalued immediately against the euro and other major currencies.
- All bank deposits are renominated from euros to the new drachma
- Tight capital controls are introduced to stop the outflow of money outside the country
- The Greeks use existing euro notes rubber stamped as a temporary hard cash equivalent to the new drachma until the new drachma notes are brought into circulation. The rubber stamped euro notes are swiftly phased out
- Strict border checks are imposed to restrict the outflow of unstamped euro notes outside the country
- Banks and financial institutions are given time to update their software in order to phase in to the new drachma
While this plan sounds simplistic enough, it would take a tremendous amount of political courage to implement it. It would also face a lot of challenges once its implementation is started.
- The implementation of this plan will almost immediately lead to severe financial chaos, rise in crime and bankruptcies.
- Legal nightmares will obviously follow
- Entities involved in cross border transactions will face a great deal of uncertainty (read: losses) as the values of their assets and liabilities would severely fluctuate.
- The introduction of a new currency would raise doubts of not only Greece's ability to borrow from the international markets but also severely affect the borrowing capacity of strained euro zone economies like Portugal, Italy, Spain and Ireland.
- A loss of confidence in the euro due to the Greek exit would start a scramble for other relatively "safe" currencies like the US Dollar, Swiss Franc and the Japanese Yen as holders of the euro dump it in favour of these currencies. As most global trade is invoiced in US Dollars, the fluctuation in the dollar's exchange rate could cause severe exchange losses to global exporters and importers sending an already weak global economy into a tailspin.
- The most dangerous outcome of this entire ordeal would be the rise of a new question - Is the euro viable?
That question comes with a whole Pandora's box of its own challenges which are not under the scope of this post. If another country like highly troubled Portugal or Ireland left the euro, then it would certainly be curtains for the euro "as we know it" and the start of a global depression. Whether the euro would survive as a rich country (mainly northern European countries including France, Germany, Netherlands, Belgium Luxembourg, Austria, Finland and eastern European countries including Slovakia and Slovenia) currency union
Its amusing and scary at the same time to think that a country like Greece with 2% of the euro zone's GDP can hold the financial stability of the planet at ransom! It is also a lesson for future economists and planners who fathom of creating a common currency anywhere else in the world. Nevertheless, the danger Greece poses is absolute and true. Lets hope that the analysts, media and governments come to realize that and shake their legs.
Mitul Choksi
April 8, 2012
No comments:
Post a Comment