- The focus should not be on Greece, but on the eurozone’s ability to solve problems.
- The eurozone has reached a fork in the road for more robust infrastructure for long-term success or risk increased uncertainty of the eurozone.
- If Greece or any nation leaves the eurozone a precedent is set for other member states to do the same, thus increasing the uncertainty of the euro.
The Greek crisis is a continuing saga: What will happen to the Greek debt? Will Greece exit the eurozone? As some are calling it “Grexit”. Don’t be surprised if further chapters of this saga continue into the next decade. Is the problem really about Greece, one of 19 current member countries in the eurozone or is this really about the decision mechanisms available to the eurozone to solve problems? It begs the question, is the eurozone lacking an infrastructure to solve major problems?
The eurozone is a loose confederation of countries tied together primarily by a common currency and the European Central Bank (ECB). In the global markets the euro is second only to the U.S. dollar in daily transactions. Several countries outside the eurozone use the euro as an anchor currency to link to their currency as a mechanism to manage their respective currency. Countries such as Andorra, Monaco, San Marino and Vatican City have special monetary arrangements to use the euro as their local currency. Therefore the impact of eurozone decisions far exceeds the eurozone member states.
The implementation of the euro expanded European economic integration to a stronger level that began in 1958 with the European Economic Community. Prior to the Maastricht Treaty in the early 1990s, Europe previously tried to create a common currency three times in 1969, 1979 and 1989. According to the European Commission, during the brief life of the League of Nations discussions were held in 1929 to create a European currency.
When economic times are good or at least relatively stable it may appear to be a straightforward solution to tie various countries together while each country tries to maintain their respective sovereignty. But when economic times are more difficult such as the recent financial crisis and member countries need to restructure, is this loose confederation enough to keep the union together for long-term success.
However currently with no other common infrastructure to resolve issues, the eurozone is slowly realizing when each country has their own agenda and the leaders are playing political theatrics as they seek support from their respective constituents; makes a very complicated situation more difficult to resolve. Europe has reached a fork in the road either work together for a stronger union and create greater unified infrastructure or the zone gradually stagnates into a shadow of its potential. As a result of the financial crisis the eurozone realized a need for a more robust infrastructure including adding a euro-area treasury. The first stage began July 1, 2015 and the last stage is expected to be completed no later than 2025. The timing of these stages could be extended as history shows, implementation of major changes in the European Union often find barriers.
If Greece pulls out or is forced out of the eurozone the confidence of the euro and the zone come into question. Which country will be next to leave? This would be similar to the Lehman collapse when banks were reluctant to lend to each other because no one knew who was going to be the next “Lehman”. Can this cause a contagion problem as investments and trade are reduced in countries that market participants believe will be the next “Greece”? This could cause a self-fulfilling prophecy of the targeted countries and the end of the zone or at least a weaker eurozone. Will the eurozone eventually become a small elite club of only strong European nations that continues to shrink or at least rotate names as the struggling nations “leave” the zone?
In the class I teach at DePaul University on managed futures and global macro strategies we have discussed the idea of a bailout from a U.S. perspective. For example, what if the United States was also a loose confederation of states held together primarily by a common currency and the Federal Reserve. One of the 50 states was struggling to survive. First the state assemblies of the 49 other states would meet to determine their respective agendas. Then 49 governors would meet to try and resolve this issue. Some of the states on the brink of struggling may want to seek a bailout for that distressed state while the stronger states may feel less likely to help as they believe it’s not their problem. Does this mean one of the 50 states would then leave the “dollarzone”? This is the current situation in Europe as some of the member countries do not believe it is their problem. However, it is problem for all eurozone stakeholders as this experience could greatly impact the future of the eurozone.
If Greece leaves the eurozone the world will be watching this experiment. Should Greece find itself successful at resolving their problems especially if it happens quickly it may set a precedent for other struggling eurozone members to return to their former currency; creating greater uncertainty for the euro.
In summary, whatever the final outcome of the Greece situation, this doesn’t resolve the issue of how the eurozone will reach solutions in the future with a member country that is struggling. This current situation is much bigger than Greece or any other member country. The decisions of working with Greece or casting it out into the ocean of a solo currency will plant the seeds for the future path of the eurozone to either become stronger or decay into the pages of history.
Investors and traders should be aware the Greek crisis could continue for an extended time as members of the eurozone determine both how to resolve the current situation, but more importantly are they preparing a process to resolve future situations? As this saga continues the euro and the eurozone could experience greater uncertainty.
In closing it seems appropriate to quote from the song Grease written by Barry Gibb:
“This is the life of illusion,
Wrapped up in trouble, laced with confusion,
What are we doing here?”