Greece saves the world (well at least for a little while)!! Stock markets around the world were up the past few days as Greece voted for their “suicide pact” (austerity plan) that is only delaying the inevitable and in our opinion is only going to make the adjustment bigger and more disruptive when it occurs in the future. The IMF is following the same playbook it did in South America in the 1980’s – austerity and raising taxes. It worked in South America, but it won’t work in Greece. The main reason is that Argentina, Mexico, etc. all had a collapse of their currencies and basically went broke. When a currency collapses, inflation goes up, especially when buying imported goods. It also sparks economic growth because the countries’ goods and services are now cheap relative to other nations. The austerity and tax measures the IMF imposed helped stabilize the Latin American countries from rapid inflation because these measures actually slowed down their collective economies. The difference from the Latin American situation is that Greece can’t devalue their currency to spark economic growth because they share a currency with 16 other countries – the Euro. The riots in Greece are just a precursor of what we can expect throughout Europe in the months ahead. The European Union only put a band aid on this mortal wound.
The real question now is whether or not the bailouts of Greece, Ireland and Portugal are even legal. According to the EU treaties, bailouts of other countries in the EU are strictly prohibited. It will be very interesting to see what happens when it is reviewed by the German high court next week.
The joy of the Greece bailout might turn as early as next week.
Either way, the people in Europe are having bailout fatigue and the end of the EU is coming more rapidly than most think because of the political pressure inside the EU countries themselves. The financially strong countries are tiring of having to pay for non-responsible countries and those being bailed out are destroying their economies (expect higher unemployment, lower GDP and higher unemployment rates in Greece ). It has taken years for the EU to build this web, but don’t be surprised if it unravels very quickly.
We hope you and your family have a very enjoyable July 4th weekend!
Your THOR Team