Greece's Imminent Eurozone Exit

by John M. Curtis
(310) 204-8700

Copyright May 17, 2012
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               Since taking office May 16, 2007, French President Nicolas Sarkozy bent over backwards pleasing German Chancellor Angela Merkel, who’s tried to hold the Eurozone together at all costs.  Despite the capital drain in most Eurozone countries, including France, Merkel insists that the Eurozone is the best economic system for its 17 member-states.  She supports bailouts for Greece and other cash-strapped Eurozone countries like Ireland, Portugal, Spain and Italy, as long as they impose punishing austerity measures on loan recipients.  No matter what the bailout, Greece simply can’t afford to slash public salaries, welfare and pension benefits to pay the European Union’s exorbitant interest charges.  Other Eurozone countries, like Portugal, Spain and Italy, could follow Greece out the back door.  No matter how much Merkel cajoles, the Greek economy simply can’t live on the inflated euro.

             When Greece couldn’t agree on a coalition government May 6, nearly $900 million left Greek banks, leaving them cash-strapped.  “The situation in the banks is very difficult,” said President Karolos Papoulias, concerned about more pressure on an already strained Greek banking system.  If Greece printed its own currency, they wouldn’t be in today’s pickle, having, on the one hand, to manage current obligations to public workers and retirees, and, on the other hand, to beg the European Union or the German-based European Central Bank to borrow more cash.  EU officials worry that a Greek exit from the euro could trigger a “contagion” that could lead to other countries heading to the exits.  “The core question will be not Greece, but Spain and Italy,” said outgoing World Bank President Robert Zoellick, concerned about a ripple effect to other Eurozone countries.

              All the worry about the breakup of the Eurozone stems from immediate liquidity problems at financial institutions, fearing sovereign countries, like corporations, could go broke.  Before the Eurozone, Europe’s sovereign states printed their own currency, just like it’s done the old fashion way in the U.S. and U.K.  Despite some initial market gyrations, currency markets will eventually stabilize once Europe’s sovereign nations return to their own currencies.  Borrowing more cash and paying more interest doesn’t solve Greece’s, or any other European country’s, fiscal problems.  Greece holds new elections June 17 with an eye on exiting the Eurozone.  Greece’s inability to form a coalition government May 6 directly related to the austerity measures imposed by the EU for current and continued bailouts.  Greeks are simply fed up with Germany’s heavy-handed austerity measures.

              Despite all of Merkel’s happy talk about preserving the Eurozone, the fact remains that the German-backed EU austerity measures make life miserable in the Europe’s cash-strapped states.  “The key issue you have got to come to terms with is if you are to have medium-term reforms, you are going to need some medium-term assurances for investments,” said Zoellick, pushing for some kind of Eurobonds to help finance Eurozone’s struggling economies.  Like Merkel, Zoellick, whose been mentioned as a possible Treasury Secretary under Romney, isn’t facing Europe’s reality.  Sovereign countries can’t continue to pile up debt, pay exorbitant interest and manage the financial obligations of its citizens.  Today’s Eurozone no longer provides the hope needed to manage growing debt and maintain the government employment, welfare and pension obligations to its citizens.

            Between now and the June 17 elections, the Eurozone will make a strong push to keep Greece in the fold.  If Greek citizens pivot to the left like they did in France, it’s unlikely that they’ll vote to stay in the Eurozone.  Whatever the sacrifices of returning to the drachma, Greeks may have no other choice.  Borrowing more cash and paying more interest won’t solve the Greece’s debt problems, now requiring ordinary citizens to lower public salaries and pension obligations.  PIMCO’s, the world’s largest bond fund, CEO Mohamed El-Erian believes the landscape’s changing in the Eurozone.  His London office chief Andrew Balls thinks its “very likely” Greece will exit the euro sometime soon.  Despite Merkel’s protests, and those of Eurogroup President Jean-Claude Junker, the Eurozone isn’t working for less export-driven economies.  Austerity is no answer for Eurozone’s cash-strapped states.

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