Editor’s Note: The following piece, exclusive to GPS, comes from Wikistrat, the world's first massively multiplayer online consultancy. It leverages a global network of subject-matter experts via a crowd-sourcing methodology to provide unique insights.
The great Troika of the European Union, European Central Bank and the International Monetary Fund has engineered a second bailout of Greece, once again saving Western Civilization as we know it. But as anyone following this long-running melo-drachma may attest, it ain’t over ‘til Chancellor Merkel says so. This week’s Wikistrat drill looks at possible future pathways for the eurozone.
Greece: Should I pay or should I go now?
The second bailout imagines Greece reducing its debt burden down to about 120 percent of its GDP from its current position north of 150 percent. Many observers will tell you that’s a nice dream, but it won’t happen. Instead, tax collection will continue to be weak, public sector unions will fight salary reductions tooth and nail, and the country’s best and brightest will leave - a trend we already spot.
The Greek government’s best path is to revalue its currency, but it can’t do that so long as it’s tethered to the euro, so it’d be worth the short-term pain to a) exit the euro, b) re-establish the drachma, and c) inflate away the debt as quickly as possible. The larger eurozone, where Greece’s economy constitutes a mere 1/50th of the whole, won’t go the cheap money route. So, as long as Greece stays in, it’s in trouble. Once out, it could attract European investments - and tourists - because it’ll suddenly be so inexpensive.
The flip side says the divorce will be inconceivably complex and long, with capital fleeing Greece in a mad rush in the meantime, so don’t even think about going there! Plus, there’s really no precedent for exiting the eurozone and remaining in the European Union – something a strong majority of Greeks want. Yes, it’ll take a generation to fight its way back to respectability, but if Greece bailed now, there’d be no assurances it could ever regain entry. (On a related note, forget about the East European EU newbies joining the eurozone any time soon.) So if Greece is going to be the poster child for austerity, one way or the other, why not stick it out - inside?
The bailout + austerity plan = killing the chicken to scare the monkey
You know the logic: Beat the weaker party to scare the stronger one into proper respect. This isn’t about Greece, which is just the current wobbly domino. This is about the largest of the so-called PIIGS - Italy. The other little piggies (Portugal, Ireland, Greece, Spain) can go wee-wee-wee all the way home, but Italy has got to go to enough markets to restructure its similarly out-of-control debt to keep the eurozone concept viable - plain and simple. By drawing a firm line with Greece, tough-love Germany tells Italy what must be done.
And it could very well work, because the Troika is now armed with a $1.5 trillion firewall of funds to stare down the remaining PIIGS - if Italy takes the hint and pursue the same salary-slashing path that’ll soon be forced upon the Greeks.
The eurozone will all float on alright
No, the underlying structural issues still haven’t been addressed (i.e., common currency without fiscal union), but the system musters just enough will - time and again - to warrant approving flows of capital from America and Asia, two trade partners smart enough to realize they’ll suffer plenty if the eurozone death spirals.
Greece isn’t just a whipping boy; it’s a mighty experiment that will inform the whole. So all kinds of plans will be tried out over the long haul, improving the situation here and there. Greece has already made tremendous efforts and achieved impressive results. Wait two or three more years and everything will look far more positive. It has already begun, or why is the euro worth $1.33 amidst Europe's most severe crisis?
Germany’s Nein! Nein! Nein! plan
Every proposed solution comes up against German opposition. Germany opposes eurozone-wide bonds (aka, Eurobonds). It opposes any country’s temporary exiting of the eurozone to get its finances in order. It opposes inflating the problem away. It opposes the two-tier solution that would give the PIIGS a pen of their own. Whatever is suggested, Germany opposes. What Germans want is the freedom to act in their interest (i.e., their huge trade surplus says they’re winning), but what they fear is responsibility beyond their borders. They’re the epitome of passive-aggressive leadership.
But who can blame them? Europeans all fear being under German rule - again! And Germany picks up on that vibe. Just track the periodic peaks of this long-running crisis and you can tell when the Europeans are getting close to a serious reform, because that’s when the op-eds start mentioning the 1930s, fascism, and He Who Shall Not Be Named. So every time it’s Germany’s time to step up and take control as the eurozone's largest economy, the H-bombs start flying and the Germans say nothing!
Then again, maybe Germany and it’s “iron lady” Angela Merkel, are simply biding their time for the perfect storm to arise, when larger designs are made possible...
What would Hamilton do?
Okay, it’s mostly the Financial Times that hawks this lead, but it’s a question worth asking. The European Union isn’t the first great stab at multi-nation building. That was these United States, which got their common currency in 1862 - thank you very much. Then again, that took the Civil War, so the question really is, if this is the greatest crisis in the European construction scheme, where is the Alexander Hamilton who sells the continent on the wisdom of the center (Germany, France, the Nordics) assuming the debts of the periphery (PIIGS)? Hamilton pulled this off with the 13 colonies-cum-states’ Revolutionary War debts: by creating the federal entity that absorbed all obligations, a strong center of gravity emerged in the fledgling American system – fiscal union strengthening political union.
So, if not Angela the Lawgiver, then who? And if not now, then when?
But think of what Germany might want in return for that effort, and then ask yourself how much pain must the rest of Europe feel before it’ll accede to, say, France giving up its permanent United Nations Security Council seat for an EU one.
Just give it enough time and we’ll see, because such backroom deals are how history is often forged. Hamilton struck his with archrival Thomas Jefferson, the price being moving the U.S. capital from New York to what became Washington D.C.
We know, that one still seems incredible to us too.
The U.S. wildcard
If the eurozone really cracks up, meaning the euro crashes and burns, many U.S. banks will immediately get sucked into this maelstrom. So the question arises: Would Washington step in with some rescue package?
Not in this election cycle. Washington would bail U.S. banks alone. On this score, muddling-through Europe’s best hope is that America’s nascent energy revolution keeps drilling along, ultimately lifting all the world’s boats on a sea of cheap natural gas.
That’s Wikistrat's “wisdom of the crowd” for this week.
Now tell us which path you find most plausible, or what other scenarios you can envision in the comments section below. And be sure to check out more at Wikistrat.com, a cutting-edge global consultancy.