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Eurozone Crisis - There Is No Better Way Than to Pay for Greece

Politics / Eurozone Debt Crisis Mar 12, 2015 - 07:29 AM GMT

By: Investment_U


Martin Stephan writes: The Oxford Club’s deep international roots are invaluable... A few weeks back, we published a piece titled “How Germany Can Save Greece and the EU.” Since then, the German parliament voted to extend financial aid to Greece by four months - a mere Band-Aid (and a small one at that). In order to right the EU economy, a permanent solution must be found. For an insider perspective on this situation, we asked our colleague Martin Stephan from The Oxford Club’s German office to give his thoughts. We hope you enjoy his unique viewpoint.

In Germany, discussions about the Greek crisis are still way too emotional - both in politics and in pubs. Many feel we have to punish the Greeks for living beyond their means for so many years. These Germans don’t want to hand over any more of “our precious money” just so the Greeks can keep up their outrageous lifestyle.

Our precious money... and the Greeks just blow it.

That way of thinking is wrong. And there are many ways to prove it. I think the easiest is to emphasize that it is not really “our money” that the Greeks blew (or will blow).

Our savings will not shrink, nor will we pay more in taxes because of the broke Greeks. The “money” either comes as a loan from European governments or as a loan from the European Central Bank (ECB).

If the loan is given by the ECB, that money gets created out of nothing. (You read that right: The money never existed before and therefore wasn’t taken from anyone.) And if, for example, the German government grants the loan, then Germany’s debt - financed by commercial banks - increases.

However, to acquire these bonds the commercial banks also create money out of nothing because they borrow 100% of it from the ECB.

The notion that all debt needs to be cleared someday - that “we” are going to pay for at least part of the Greek debt - does not lead us anywhere. Because governments don’t clear debts. Ever! Only you and me and most commercial enterprises have to repay our debt under the conditions agreed upon with the creditor. Countries or governments are not required to do that.

To be precise, it is the nature of our credit money system that public debt does not get cleared. Instead it increases over time, with interest rates adding to the debt.

Every professional investor knows that neither the Greeks nor Germans nor Americans will ever clear their debt. Instead, they will prolong it into the future until day X - the crash of this system.

With that said, we have to acknowledge that the creditors keep a close eye on the exact conditions of this permanent debt situation. This is why government debt should never increase too fast. A new debt of 3% of GDP is considered to be legitimate and uncritical. A 10% increase? That, on the other hand, needs some explanation. It is also important what the new debt is used for.

Greece has lost credibility for now. There is no question about it. The way the Greek government has handled money in recent decades is the reason why private investors will not grant new loans. Therefore, other governments or institutions like the ECB or International Monetary Fund are the only ones that can step in - and that is what they should do.

Before the euro was introduced, there was no doubt that structurally weaker economies would be united with strong economies, and, to keep everyone afloat, transfer payments would be inevitable. The European Economic Community was mainly founded to channel grants and transfer payments in a comparably fair way among European countries.

Just like other eurozone members, Greece has massive structural problems in comparison to Germany. Some of these problems will never get solved. And while “the Greeks” did live beyond their means at “our” expense, they have not accumulated considerable wealth.

As a frequent visitor of Greece I can tell you that you don’t want to switch places - at least from an economic standpoint - with the Greeks. There is a massive wealth gap between the rich and poor.

But Europe must not fall apart.

Greece belongs to Europe and the European Union (EU). It should have never become part of the European Currency Union. But that was a decision Greece never made - it was made by European politicians (including those of Berlin). Now every individual setback threatens the very existence of the EU. Even today, countries’ interests are way too diverse to support the idea of a “unified Europe.”

You don’t need to be a prophet to predict which way orthodox Greece will turn if Europe fails to find a solution: eastward.

And considering Russia’s ambitions to create a “New Russia,” it would come as no surprise the country decided to move “a little closer” in the southwest direction. It isn’t even very far. All that would be needed is a little more enthusiasm from Turkey’s President Erdoğan and done is the westward expansion of Russia. That would include a beachhead in front of Italy’s shoreline.

There is no alternative to cutting Greek debt.

Instead of blaming each other, there should be a top-down analysis on how Greece could get back on its feet. And we need to figure out how to keep the country from reverting to its old ways.

The first step is to acknowledge that a debt of 175% of the GDP is not acceptable. No private investor in history would lend money to the Greek government or anyone else with that level of debt. A haircut of at least 70% is - using the words of Chancellor Merkel - without any alternative.

Afterward, Athens and Brussels must calculate a national budget for Greece that includes structural reforms and investment programs. The budget has to be supported and controlled with transfer payments from the EU. At least for a limited amount of time.

It is inevitable that the Greek government has to acquire new debt, and we have to be clear that a primary surplus cannot be its focus for quite some time. It is crucial that the economy grows again, that unemployment rates decrease and taxes increase. Over the next five years, it is totally possible that such a program would add up to a cost of 75 billion euros.

But what is the alternative? For Europe to pay for Greece´s exit from the eurozone? And don’t forget about the geopolitical risks I mentioned above.

The sooner we refinance Athens and stop the taunting rhetoric, the better. Only then can we look forward. And that would be best for all of Europe.

Good investing,

Martin Stephan


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