SUMMARY. Perhaps you’re already swamped with comment about Greece. But it appears to us that many commentators are far too relaxed, haven’t considered the problem in its proper historical context, and have had little or no regard to the social dimension. Increasingly taxpayers and voters will take control throughout Europe, and this will considerably increase risks for investors. A period of extended vigilance, years, is upon us.
You can’t ignore what is going on in Greece. Greece in itself is not important, no more than were Iceland and Dubai in isolation. But Greece is important as the latest financial crisis derived from the debt bubble which has been building since the early 1970s in the developed world, with the added dimension of this being the first serious test of the euro experiment. The EU journey, which began with a well-meaning free trade agreement in 1951 to bring an end to 1,500 years of European conflict, became fatally flawed with the creation of the euro – it was simply a matter of waiting for the first major economic downturn, which would expose the flaws acknowledged by many on the continent in the 1990’s, not just by jingoistic Anglo Saxons: the fundamentally different economies, the varying cycles, the awkward facts of history supporting fundamental lack of cross border trust, hugely different cultures, and a range of aggressive labour movements. There wasn’t so much an alliance of Europe’s political elite and “the street” for the last decade or two, more a truce.
It is highly likely a deal will be struck so that Greece can roll over debt that matures on 19th May, allowing for some stability in markets through the Summer – but it will be no more than papering over the cracks.
The Draconian austerity measures will mean less growth for Greece, meaning a lower tax take, and less tax means it will be even harder to balance the books. And the standard option to boost growth, currency devaluation, is not available, at least not yet. While many economists (implausibly in our view) appear to believe such measures will do the trick without some level of default and with the eurozone remaining intact, they completely overlook the social dimension. The people of Greece will be hit very hard, for a number of years, by severe recession.
Runs on banks are already commonplace, labour unrest will escalate, and dangerous, opportunistic, nationalist politicians will emerge. This is not a recipe for the eurozone holding together in its current form. Now imagine similar in Portugal and Spain, Italy, even France. Some have suggested that Greece’s current problems are like Lehman’s in 2008. They aren’t. This is more like Northern Rock in 2007, an early symptom of much larger problems yet to unfold. In the years ahead it is tax payers and voters, “the street”, who will dictate events.
The risks are clear, but the precise events and timings are impossible to foretell, just as was the case from 2007. So investors and advisers must remain vigilant, observing assets that are outperforming and otherwise staying close to the exit, for an uncomfortably extended period.