Why forcing a Grexit will cost us all

Greek refusal to capitulate to failed austerity economics should be applauded

Why forcing a Grexit will cost us all

The latest twist in the Greek economic tragedy has been the decision of the Greek Government to delay a €300m (£218m) payment to the IMF.

It is one of several payments that the Greek government says will now be bundled together at the end of the month.

Many in the media are castigating Greece for this. However, the real discussion point ought to centre around the efforts of Greece’s creditors to force more austerity on an already beleaguered country.

This saga has already dragged on for years and it seems clear that the most sensible course of action is to recognise that some of its debt needs to be written off. Otherwise, Greece will be forced to leave the EU. An event that will further destabilise Europe.

Certainly, the EU/IMF and ECB now appear less able to bully this democratically elected Greek government (elected to stop austerity) into imposing more austerity on its population. Given that the Greek economy has already shrunk by 25% over the past few years the odds must now be on the Greek Government refusing to bow down to its creditors demands.

Even if the current Greek government did capitulate, all that would happen is that the economy would shrink further, Syriza might fall and divisions in Greece would increase. Given the strength of the fascist Golden Dawn party in Greece, who knows if a civil war might eventually ensue?

If attempts to negotiate a compromise fail, and faced with the half-baked economic policy of its creditors, the most logical course of action for Greece would then be to leave the Eurozone. It would certainly help the Greeks to take control of their own destiny and show that there is an alternative to austerity without end.

Unfortunately, it would still mean that European policymakers remain wedded to the failed and naïve economic policy of austerity. It’s a policy that has already cost Europe’s citizens dear in terms of lost economic growth and high unemployment. (Anyone doubting that austerity is naïve should watch this video interview with Professor Steve Keen).

Those who believe Greece is too small to matter are also missing the issue of contagion, as Nouriel Roubini has pointed out. His call for compromise has clearly been heeded by the Greeks who have made concessions but the EU, ECB and IMF are not doing likewise.

Unlike many of those baying for the Greeks to continue policies that have shrunk their economy and increased unemployment to 25% Yanis Varoufakis, the Greek finance minister knows more austerity is poison for Greece. Thus he wrote recently that ‘Austerity was the only deal breaker’.

Ironically, Varoukfakis seems to be one of the few leaders in Europe with a vision for how to bring economic renaissance and hope to not just Greece but the millions who are suffering the ill-effects of economic policies that put bank debt before people.

Tax payers

If the Greek situation does not come to a fair resolution it will continue to impede the growth of not just Greece but the whole of the EU. Tax payers, who bailed out the banks, will continue to pay for mistakes made by the political financial elite who got us into this mess.

Moreover, should Greece be forced out, volatility in the financial markets will increase greatly. In such a scenario you can likely expect Germany’s recent bond tantrums to be outdone by a bond market meltdown that spills into equity markets.

Investors

At this juncture investors would be well advised to keep cash aside to provide for some optionality in case of market falls. It might also make sense to heed the advice of investors including Jim Rogers, Mitch Feierstein and Marc Faber, and have some money parked in physical gold.

This is certainly not the time to be taking risky bets on any asset class. Maintaining your margin of safety and hedging your bets ought to be the watchword of every investor.

Enter your e-mail address to receive updates straight to your inbox

Sign up to Investment Insights direct to your Inbox...

Categories: Editor's Picks, News, Viewpoint

About Author

Christopher Menon

Every Investor Editor Chris Menon is a financial journalist who has written regularly for national newspapers, magazines and websites about personal finance, with particular emphasis on investing.