The Ramifications of a Grexit

Greece is getting headline news again in the financial media.  I know we have been down this path before.  It is almost a version of Groundhog’s Day, as once again we are waiting to see if there is some kind of an “agreement”.

These agreements are mainly between politicians and central bankers.  It is not as if the average citizen gets a say in the matter.  They aren’t going to hold a vote in the European Union on whether to continue bailing out the Greeks.

I have no idea what is going to happen this time.  We may see the can get kicked down the road, yet again.  The bailout would have to come from somewhere.  It could be the Germans.  It could the be the U.S. Federal Reserve.  It could be the European Central Bank.  It could be the IMF, some of which is funded by the U.S.

It seems they can always delay the day of reckoning longer than it seems possible.  But let’s remember that this has to come to an end at some point.  The Greeks simply cannot pay their collective bills.  The Greek government spends more money than it can collect in taxes.  And as the economy continues to spiral further downward, there aren’t going to be many taxes left to collect.

The Germans need to pull the plug on the whole thing.  They would probably benefit the most.  And when I say “the Germans”, I don’t mean the government there.  I mean the people need to overwhelmingly demand a stop of the handouts.

I like how some people make it look as though the Greeks are somehow being abused.  Well, maybe the people are, but it is mostly self-inflicted.  But we hear complaints about austerity being “imposed” on the Greeks.  It isn’t being imposed.  They can simply withdraw from the European Union and default on their debt.  But guess what?  No more handouts.

So that is the real problem for the Greeks and their apologists.  They don’t want austerity “imposed” on them, but they want to keep getting the free lunches.

If there is a Greek exit – commonly known as a “Grexit” – then what will this mean for everyone else, other than the Greeks?

First, Greece is a relatively small country.  It is not any kind of an economic powerhouse.  Its direct economic effect on the world is minimal.

However, for a small country, it has racked up a lot of debt.  In total, the Greek government owes over $300 billion.  Most of it is owed to other European countries or the IMF.  Only a small percentage is owed to private investors.

A default will certainly hurt some of the European governments.  It is hard to say how much it will hurt the banking system.  The Greek banking system is already on the verge of collapse.  For the wider European Union, the ECB is not going to allow a major banking collapse.

I think the bigger ramification of a Grexit is the precedence it will set for others to leave.  Not too long ago, it was common to hear the term “PIGS”.  This is an acronym for Portugal, Italy, Greece, and Spain.  Sometimes you will see “PIIGS”, which includes Ireland.

There is a reason these countries are grouped together.  They all have major financial trouble.  They are all covered in debt.

If Greece officially defaults (it has already technically defaulted by missing a payment to the IMF), then what comes next?  Why should we not expect the same thing to happen with Spain, Italy, and Portugal.  These are much bigger potatoes that we are dealing with.

This is why I think the European Union is going to break apart eventually.  It may be this year or 5 years from now.  But it is not really sustainable over the long run.

Some of the countries will be worse off when they get their own central bank back and inflate like crazy.  Some countries, such as Germany, will hopefully be better off in the long run.

Decentralization is generally better for liberty, but this isn’t to say that it will be great for everyone.  If Greece exits and turns up the inflation with its own central bank, the economic conditions there could get even worse.

Even though Greece is a small country, this story matters.  It matters because of what will follow.  It will be somewhat symbolic of what is to come for some of the bigger countries.

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