Monday, September 12, 2011
- Misreading The Euro Situation
Upon reflection, I think I might be misreading the Euro situation. I still think it's on borrowed time (this seems to be becoming the prevailing view), but I've been thinking about this from a financial perspective instead of a political one, and that might be mis-coloring my take on it.
Up to now I've been publicly saying that I thought it made more sense for Germany to leave the Euro than for Greece to do it. This was because if Greece goes, then they'll be followed by Italy and Spain and Ireland etc as market discipline is enforced on each of those countries in turn. The result will be a euro that is shattered rather than cracked. From a financial perspective, this is stupid and will result in lost and lots of dislocation - far more than if Germany left and the Euro was then allowed to inflate as the PIIGS require.
But a financial solution is based upon the optimal outcomes, and politics isn't about outcome, it's about intention. The inevitable solution to the Euro crisis will be political not financial. So I think it's entirely possible that Greece is forced out, followed by the rest of the big spenders, even though it will be worse for everyone.
Greece cannot survive without a change to the euro structure. That's a foregone conclusion. The chickens (to quote a Chicago area clergyman) have come home to roost, and reality is knocking at the door. To imagine that Germany will take on any amount of pain that it isn't absolutely forced to in order to ease the transition of the Greeks is probably mistaken. Even if would mean even less cumulative disruption for the Germans as well.
The politicians will believe that they can avoid some portion of the consequences, right up to the edge of the waterfall. Once they go over, they'll believe they can avoid the consequences of hitting the bottom, and once they hit the bottom, they'll believe they can avoid the consequences of going under.
For these people, hope isn't guarded optimism about the roll of the dice, it's a mandatory worldview which involves ignoring all potentially negative outcomes. People like don't reach optimal solutions - ever.