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Tora: Greece euro exit could see others follow

There really is only one story capturing attention in the market at present – what is the future for the euro?

If the behaviour of shares is to be believed, the future looks bleak. Core to current perceptions is the possibility – likelihood even – of Greece leaving the single-currency zone, with all the implications this may have. It does no harm to examine likely consequences of this happening and the alternatives.

Markets do not like uncertainty, which is why shares are in retreat at present. Uncertainty lies at the core of what a break-up – even a partial one – of the eurozone might mean. Perhaps the biggest fear is that Greece’s departure might force other leavers. After all, the single-currency zone was conceived as set in concrete.

If it turns out to be membership of a club that is optional, then why should the leavers just be the smallest and weakest?

If such a concept took hold, then who could blame investors from eschewing those nations likely to exercise their rights to exit, preferring the core nations with stronger balance sheets? Such a scenario would accelerate the flow of money from the embattled Southern European states to the stronger Northern countries such as Germany and Finland.

To some extent, this is already happening. Last week, Kent County Council withdrew its short-term deposits from Santander’s UK operations to reduce risk of exposure to default. But then, it had been a victim of the Icelandic banking collapse.

Whether or not its concerns are justified, we all know that at times of financial stress, people will opt for the perceived safety-first policy.

Witness the low level of government bond yields here in the UK and in the US for that matter. Now, there is a nation with extravagant debts – one which has even had its credit rating downgraded. No one expects it to default, though.

So, allowing Greece to leave the single currency could well increase the level of concern rather than defuse it. And if a domino effect becomes apparent, then who might be the greatest losers? Why, the Germans, of course. Aside from the fact that the German economy is strong, helped by a currency held back by worry over its future, the Bundesbank owns staggering amounts of debt from the very nations that might try to engineer a devaluation.

But the alternatives involve stepping back from the severe austerity packages presently being imposed upon those countries in receipt of bailout cash. German taxpayers may not be keen on this. But then, do they fully appreciate the cost to them as taxpayers if vast tracts of the eurozone effectively devalue? And what happens to their competitive position if faced with a de facto reimposition of the Deutschmark?

The problem for Europe’s leaders is that their electorate do not see things the way they do. The number of political casualties as a consequence of this particular debacle is high and rising.

Francois Hollande came to power in France on the basis that austerity was not the only answer. The next Greek government will almost certainly take an even more entrenched view along the same lines. Democracy means that the final outcome cannot be predicted.

For investors, all this adds up to a difficult time when betting against the crowd could prove very damaging in the short term. It could be, though, that this represents more of an opportunity than a threat.

Even the hardest-nosed Northern European leader must recognise by now that allowing the euro to fail will threaten growth for years to come. The price could be inflation, of course. We will have to wait and see but if consensus is achieved we may not see these market levels again.

Brian Tora is an associate with investment managers JM Finn & Co

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  1. Julian Stevens 25th May 2012 at 11:34 am

    The whole EuroZone experiment was a disaster in waiting from the word go. It could never work. Colossal sums of money were more or less given, without collateral or conditions, to countries with established track records of poor economic governance ~ in the completely misguided belief that somehow or other they’d become strong and competent trading partners in just a few years.

    Said countries took these grants with open arms (naturally) and just blew them all without building any sort of sustainable foundations for the future. The only reason Ireland underwent a (short term) boom was because it was spending other peoples’ money with no real plan for paying it back. In Greece, tax evasion is an ingrained part of the national culture. Membership of the EuroZone hasn’t changed that one iota.

    Now these countries can’t afford even to service their debts, let alone repay them, their populations are up in arms about the imposition of austerity measures and their governments are on the verge of just walking away from their obligations. The attitude is just to dump the mess on the rest of Europe and let everyone else take the economic pain. What can the rest of the EuroZone do about it? Nothing at all, because the money was lent without collateral. What collateral could have been stipulated anyway?

    And these are countries that France and Germany believed would make good economic partners for the future? The UK was wise to steer well clear of all of it.

    Can anybody cite a single benefit of the UK’s involvement in the EuroZone? We get laws thrust on us by Brussels that we don’t want and, even if we did, we could enact them for ourselves without anybody else dictating them to us. Do we have a stronger trading relationship with the rest of Europe? I would suggest that we don’t and if we had signed up to the Euro, we’d be in even deeper economic difficulties than we are now.

    Whatever were the people who conceived the whole EuroZone fantasy thinking? They should all be banned for life from holding any sort of position of power.

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