And good riddance! When different economies line up under the same currency, eventually bad things happen. One polity eventually wants lower (or higher) prices. Either the first nation suffers runaway inflation or the second suffers deflation and depression. This was true of the international gold standard (France forced its lower prices on the rest of the world). It was true of the dollar standard (Germany wasn’t happy with the Fed’s easy money in the 1970’s). And Germany today has gotten its way in the Eurozone at the expense of Portugal, Spain, Italy and Greece. Southern Europeans aren’t blameless. After all they have failed to reform and have large debt-to-GDP ratios. But it takes two to make a debt happen.
Germany thinks it can isolate Greece from the other Mediterranean countries. In the short term, this is true. Governments in Portugal, Spain and Italy are taking a tough line on Greece because they know left-wing parties will clamor for their own debt relief packages should Syriza succeed. But the pressure for easier money is already coming to a head. While Spain, Portugal and Italy are doing a little better, the glimpse of what an economy could be like with easier money will be too much temptation to slug it out under German austerity.
What will happen if Greece leaves the Euro? At first, turmoil. But freed from the shackles of ECB tight money, a new Greek central bank would devalue and become competitive in record time. Look at Argentina after it ditched its currency board in 2002. The left-wing parties of Spain, Portugal and Italy surely won’t look away.
Syriza’s statism will surely hurt Greek prospects. But the elephant in the room is falling prices. With the chance to escape the Euro’s straitjacket, the Greek economy will eventually enjoy strong growth in spite of what Syria does to screw it up. Seeing their worst-off neighbor suddenly doing better after throwing off the shackles of the Euro, I would think it quick indeed that Italy, Spain and Portugal queue for the exit.
I remember the launch of the Euro fondly. I lived in Brussels at the time, and was very happy when I no longer had to calculate 40 Belgian Francs to a dollar. But tight-money policies at the ECB have wrecked Eurozone economies, even as countries outside the Euro like the United Kingdom and Poland do okay. Maybe a rump currency including Germany, France, Austria and Benelux could survive. After all they share a more common economic interest than more-far-flung Ireland, Finland, Eastern Europe and the Mediterranean.
What does this mean for your investments?
I’m sure a lot of folks are very tempted by Spanish and Italian stocks right now. They are cheap, and there’s potentially a lot of value in them. Even Robert Shiller has opined on leaving US stocks for cheaper pastures. But valuations in those countries are cheap for a reason. Leaving the Eurozone may be good for their respective economies in the long run, but it will be a turbulent short term for everyone. Unlike Switzerland, which saw the franc spike when it ditched its peg to the Euro, southern Europe’s currencies will experience quite the opposite when the tether to northern Europe suddenly breaks.