Greece: After the Euro

I have been saying for some time that it is impossible to second guess the way the eurozone mess is going to go because of the continued idiotic interference of politicians. I have also said that the euro is a currency that survives purely on confidence. Well, I think we have just had a serious change in perceptions.

Confidence in Greece using the euro is evaporating fast. Once that mood gets enough traction it will be impossible to stop, and the country will be forced out of the eurozone simply because it will become a monetary wasteland.

Those of you who read the New York Times (probably not a lot) will have noticed some interesting articles recently about Greece, Italy and Spain.

The news is that large corporations in the US and other countries are preparing for a Greek exit from the euro. Several companies, including Visa, say they can cope with a Greek exit within 24 hours, and they have contingency plans for a new currency. It looks as though politicians are going to be side-lined on this issue at last.

The problem is one of confidence. All fiat currencies rely solely on confidence. Hard currencies are backed by something else, usually gold, maybe oil. Fiat currencies are backed by consensus. If you look at a euro note you would be hard put to work out what it really is, who printed it, who guarantees it, and what it’s supposed to be worth. It might have a 20 written on it, but what that 20 is worth is another matter.

The fact that more and more international companies are questioning Greece’s ability to survive within the eurozone (which is really so obvious only a politician cant see it) means that confidence is going. With that gone, the currency is effectively gone too. It’s no good a politician saying we can paper it over. If no-one believes the politician, that statement is worthless. International businesses have simply stopped believing the politicians.

The question is, who is going to pay workers, and with what. Greek companies will have to do what they have to do, but what about international businesses? What about trade? Most firms dealing with Greece are already demanding money up front. Banks are already organising transport mechanisms to get bags of cash over the border to pay workers. Obviously with a currency change all banking will come to a halt.

This also means that companies have emptied their Greek bank accounts. All this worsens the situation, and it is clear the euro in Greece already has no international value. There could still be a proper rescue but the effectiveness of that rescue would have to be believed. Unfortunately no-one believes there can be any effective rescue. One of the major political problems is the stark reality that Greece has not put in place a single reform demanded as part of the previous bailouts.

If you look at the fundamentals, Greece is in a far worse position now than it was three years ago. It long ago went beyond the point of no return. Businessmen are realists. I would say it’s over.

The real question then is, what happens about Spain and Italy? I note the airlines are making contingency plans for a Spanish exit. I think that might well be good for Spain, but it will put enormous pressure on Portugal if Spain does decamp. I’m not convinced at this stage, but I think it’s all over for Greece. If the politicians hang it out much longer they will do enormous damage to the whole european economy.

There are interesting times ahead. Let’s just hope we can get the Greek thing over and concentrate on the next problem.

A massive devaluation is on the cards for the new currency. That will make property cheap. But it wont solve the dead-beat state of the economy or the various restrictive practises which are still in place, and look likely to remain, or the massive government subsidy situation, which presumably is about to recoil from a serious shock after the bailouts stop.

One other interesting fact. Forgers have stopped bothering to forge euro notes. That is significant. If the forgers dont think the currency is worth forging what the heck are the rest of us to think?

Now might be the time to start looking at nice tourist spots with a view to buying after the crash. But do wait for that crash, it’s coming.

john