What Happens if Greece Leaves the Euro Zone?

Athens, Greece: Welcome to the Grexit.

I come to you today from a small, corner café in the Plaka neighborhood, the oldest in Athens, built in the shadow of the Acropolis. I’m lunching — and writing — al fresco as Athenian life unfolds around me on the cusp of what is supposed to be the end of the world as Greeks know it.

Yet, life seems to carry on, largely unperturbed.

Few here believe a Grexit is even remotely possible. This is the country, after all, where democracy was born. And no one believes, as do the U.S. and British press, that democracy will also be buried here in the form of a Greek exit from the euro zone and the European Union — an exit I should point out that the Western media mouths have, like so many Chicken Littles, been warning was imminent since 2010.

I’ve been disagreeing with them for just as long. Their analysis is simply wrongheaded. They’re being played by political operatives who have certain political agendas best served by getting out to the populace a message of fear: the dreaded Grexit.

After spending five days in Athens talking to bankers, venture capitalists, economists — and random cabbies and a jewelry-store owner — I have an answer to those who ask “What happens if Greece leaves the euro zone?”: A Grexit … Will … Not … Happen.

The Greek Parliament.

The question of what happens if Greece leaves the euro zone for a new drachma is so cataclysmic for Greece that even the amateur politicians running Syriza, the Greek anti-austerity party, will not allow it happen — despite the vitriol spouted in Greece’s parliament for the benefit of the voters who put Syriza into power. The reality is that 80% of Greeks want to stay in the euro zone — and a nearly equally large number is willing to accept a bad deal with the Germans over dismissal from the common currency.

Nor do the Germans want Greece out of the union — despite all the windbaggery emanating from Berlin about taking a hard line on Greece. The Berliners know a Grexit is most assuredly not manageable in a clean fashion and would ultimately destroy everything the euro and the European Union stands for … and that would ultimately destroy the EU, and with it, the German economic miracle built on free trade between European countries unencumbered by currency conversions and border crossings.

What we have, and what the popular media fail to piece together, is various forms of Game Theory all unfolding at once.

Everyone has a dog in this hunt. Everyone is trying to out-game the opponent. And everyone knows each other’s actions over the years are a big reason we’re here in the first place … yet none of them want to tell their individual constituents the truth.

So, to bring you up to speed on Greece and the opportunity this crisis presents, let me break down into a few very meaningful parts the years of mistakes that have made us worry about what happens if Greece leaves the euro zone … and why this Greek drama will never end in a Grexit.

Greek Spendthrifts

First things first: The Greeks. They screwed up.

They lurched socialist in the 1980s. And as all socialists do, they mucked up the economy by larding it with public excess. Prior to the ‘80s, Greece had a relatively small public sector and small public debt. But vote-buying politicians love to spend other people’s money buying votes, and so everyone with a favor to call in or a child in need of a job found a politician willing to find state employment to keep a voter appeased.

By the ‘90s, Greece’s admission to the European Union — and its movement toward meeting euro-zone qualifications — was paying dividends: It suddenly had access to cheap credit, allowing the political class to borrow at German-level interest rates … which they promptly used to expand pension benefits in Greece faster than salaries, and to add layer upon layer of bureaucracy to create unnecessary jobs that insured votes, creating a bloated, inefficient public sector.

Banking Blunders

Second: We have the Germans and the French.

They screwed themselves in the 2000s. For years, German and French bankers loaded up on Greek debt. They figured that since Greece was an EU country, with EU interest rates, its credit worthiness was no different than Germany’s or France’s.

Turns out, not so much.

When Greece’s debt problems threatened to swamp the country in the wake of the global financial crisis, the German and the French governments spent oodles of taxpayer money pretending to bail out Greece when, in reality, they were using Greece as a pass-through entity to bail out German and French banks that should have collapsed from their own investment stupidity.

But that message — our bankers are morons — isn’t politically expedient at home. So, rather than man up and admit their fault, they blamed lazy, pampered Greeks who squandered all the money on Ouzo-soaked vacations and an early and overly-generous retirement. Much easier that way.

And a Faulty IMF

And, pulling up the rear, we have the folks inside the International Monetary Fund — never the sharpest tools in the shed and quite often some of the dullest. The IMF has a history of faulty economic analysis, a fact on display in 2007, just before the global crisis exposed Greece’s failings.

Local Greek economists were pointing to the worrying spiral of public and private debt amassing in Greece and warning that the country was on an unsustainable path. The IMF, however, published upbeat reports that, while noting that households were becoming overextended, “The Bank of Greece has responded to these risks by stepping up its monitoring of banks’ lending standards, strengthening provisioning requirements, and introducing prudential measures to limit credit to highly indebted households.”

They just didn’t pay much attention to the state itself.

Now, here we are. All three players have had a hand in creating this mess. And all three have good reasons to fix what they all screwed up.

That fix is coming. But it might entail some pain very soon, possibly this week or next. That pain will pass, however, and opportunity will shine brightly in its wake.

But that’s the story for tomorrow.

Until next time, stay Sovereign…

Jeff D. Opdyke
Editor, Profit Seeker