Euro Mood Swing

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With the Greeks looking more likely—and willing--to leave the euro behind with each passing day, the mood in the Eurozone is changing…

The civil unrest, financial hardship, political paralysis, and bank runs in Greece are certainly helping to shape opinions about the wisdom of the austerity policies in the Eurozone.

And the mood swing in Europe is definitely swinging away from austerity, which is quite understandable.

So far, all austerity has done in Greece is cause deflation and riots...and not just in Greece but most of the Eurozone…

Now many are open to a different approach, which is the pursuit of “growth” by adding more debt, following the US lead.

What’s really behind this mood swing and how serious is it?

And honestly, just how important is Greece to the rest of the Eurozone?

First of all, it is serious…pro-austerity leaders are being thrown out of office throughout the Eurozone. There have been 7 leaders ousted this year so far…

The latest casualty, of course, being Nicolas Sarkozy of France.

Sarkozy was an ally of the austerity plans that are in play and wreaking havoc in much of Europe, including Greece.

Europeans are scared

And to be fair, the austerity plans have been so painful in Greece that the social fabric of the country is being ripped apart live and in color on a daily basis in the 24/7news cycle.

That’s not to say that spending cuts and deficit reduction are not necessary for recovery at some point, because, in fact, they are.

But that process has to be managed over a much longer period of time. Greece is experiencing what’s known as a hard landing; its entire way of life is all but over. Poverty is rampant, with violence and barter on the rise. It is doubtful that Greece can remain a functioning and open society for too much longer under such duress…

Even though absurd levels of debt in the Greek government caused the mess in Greece, the political and social disaster that we see there today stems from the pace and depth of the austerity measures…

Greece is finding out that trying to balance its books through austere cuts and high interest payments is a cure that is just as dangerous as the disease. It is politically untenable to stay on that path right now.

On the flip side, their reliance upon debt has crippled the private sector and warped the public sector so that neither can work without more money coming into the system.

To put it politely, the Greeks are between a rock and a hard place.

Expecting austerity to be fruitful as the Greek economy rapidly deflates is not realistic…

And the result—Greece’s meltdown—is what people in Spain, Italy, and even France are seeing. And they know that it can--and may well--happen in their countries, too.

Quite frankly, the people in the Eurozone are scared. And they are voting against their pro-austerity leaders as much as they are voting against social disintegration. To them, they are one and the same.

But wait, how does this solve the debt problem? Greece’s debt were already discounted 70% or more…

Won’t Eurozone banks fail if they default again? Won’t other PIIGS nations also default as well?

The answer lies in what the European Central Bank (ECB) and other institutions are willing and able to do. The US supports the new French President’s stimulus based anti-austerity policy…but has yet to see what he proposes to fix the basic problem of huge debts and public burden.

Germans fear isolation

Another mood swing underway in the Eurozone comes from Berlin. It’s no secret that the German-French austerity alliance is over. And without France, Germany is isolated; and even with France, Germany is still well above France economically and diplomatically. The Germans have been calling the shots on austerity and taking cover behind the French while doing so. Mr. Hollande, France’s new socialist president, has put an end to that.

So now the Germans are alone in the Eurozone. Not only are they the largest economy in the Zone, but also, they are the only country that is not in recession. In fact the German economy has grown over 2% year over year. Greece, by comparison, saw its economy crater by 7% in the 4th quarter alone.

Guess who’s not popular again?

That’s why German Chancellor Merkel’s mood is moving away from austerity…there is no other choice from political viewpoint in the Eurozone. She has no allies. However, domestically, it is not popular for Germans to pay the bills for the rest of the Eurozone.

How’s that for a dilemma?

The fact is, a political solution has to be found, or Greece’s unrest will be only the beginning.

But it is also true that a financial solution must be found, or the euro will fail. As it is, with 30% of the Eurozone GDP and positive growth, Germany is already a giant surrounded by weaker, bankrupt economies.

Add in the rise of extreme right political parties and the Eurozone starts to look like 1933 Europe…

The harsh reality is that things may not be fixable at all in the Eurozone as the mood turns nasty…

What then?

We all know how long a foul mood in Europe can last, don’t we?

And those are…The Gorrie Details.

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One Comment

1. 

   simon

   May 17, 2012 at 1:19 pm

   perhaps the uk model of a european market is the one to follow and not the common currency.
   its either more economic union or a looser one

   Reply