This article was published by The McAlvany Intelligence Advisor on Wednesday, July 8, 2015:
Nigel Farage
Nigel Farage, named “Briton of the Year” in 2014 by the London Times, has finally found his voice. He noisily departed the conservative Party in 1992 after the signing of the treaty that created the European Union to start his own UK Independence Party (UKIP). His criticism of the EU has been steady ever since, culminating in his eulogy on Monday: “The European Union is Dying Before our Eyes.”
According to Farage, Sunday's referendum in Greece sealed its death warrant, even if somehow the Greek PM Alexis Tsipras is able to come to terms with the troika and have them turn on the financial spigot once again: “It [was] a crushing defeat for those Eurocrats who believe that you can simply bulldoze public opinion.” He added,
The EU's old, outdated ideas have been rejected at the ballot box in exchange for a new approach and fresh thinking.
The result is a tired, stumbling European Union that is dying on its feet before our very eyes. Credibility for the project is fading fast as citizens right across Europe awaken to the reality of its authoritarian instincts that seek to ride roughshod over public opinion.
That shift in public opinion bodes ill for the EU. The only cohort to vote “yes” on Sunday were Greeks aged 65 and over. 80 percent of those under age 35 voted “no.” In all, nearly two thirds of those voting said “no” to more austerity measures in exchange for more bailouts. The younger crowd doesn't remember the siren song of “peace, prosperity, and freedom from war” that was sung at the EU's birth. Under the guise of offering guarantees of no more World Wars, the Trojan Horse containing soldiers of totalitarianism and the new world order was successfully sold to those once-sovereign nations. Now, thanks to the Greeks, the guise has been ripped away and its true purpose has been exposed for all to see.
Despite meetings taking place while this is being written, the two parties are so far away that any agreement to restart the bailouts is days if not weeks away. The clock is ticking: Greece must pay $4 billion to the IMF by July 20th and, without the bailout money, it won't be able to.
Tsipras wants the troika to forgive 30 percent of the $350 billion his country owes to the international bankers, and to postpone payment on the balance for 20 years. Merkel and Hollande (of Germany and France, respectively), on the other hand, don't want to send good money after bad, at least until Greece fulfills the promises it made in order to get previous bailouts.
Tsipras has fired his incendiary finance minister and replaced him with another leftist with better social skills in hopes that he might be able to mend some fences. Tsipras has steadfastly said from the beginning that the referendum had nothing to do with exiting either the euro or the EU. So both parties want Greece to stay. It's all about the details.
In the meantime, Greek citizens are suffering mightily. The banks are closed, thanks to the virtual shutdown of the ELA – emergency loan authority – that was keeping them alive. ATMs are only burping a measly $67 a day to customers who still have money in their accounts, while those with more than $8,800 in their banks are about to get a 30 percent “haircut” in order to recapitalize them. It will be called an “equity participation,” no doubt, but once again the truth will out: it is outright theft that will occur regardless of any agreement between warring parties before July 20.
Food shortages are beginning to show up, vendors are no longer taking plastic, business owners unable to make a go of it are closing up shop, and gasoline and energy prices will continue to increase. In its desperate search for funds just to keep the lights on, Tsipras' government has raided the cash reserves of its state-owned gas company, DEPA, along with those belonging to all other public companies. It has even demanded that pension funds place their cash reserves with the country's central bank for easy access by the government.
It could get even worse. Greece imports 99 percent of its oil and gas, and any concern that DEPA will be unable to pay its bills to those providing those products is likely to set off a chain reaction that could collapse the economy. As explained by a senior consultant at the energy consulting firm Poyry:
This unfavorable framework could therefore result in a collapse of gas demand, as imported energy becomes too expensive to use by the Greek population [as customers] find themselves unable to settle their bills towards Greek importers, which could in turn affect the latter's ability to pay their foreign suppliers.
That's how an “energy consultant” describes a death spiral in an economy whose customers are no longer able to pay their bills.
There's a little movement from the “Eurocrats,” which could hasten an agreement. Wolfgang Schauble, Germany's Minister of Finance who in the past has strongly opposed any more bailout monies to Greek until they fulfill previous promises, said over the weekend that, no matter how the referendum turned out, he wouldn't leave Greek citizens “in the lurch.”
But with the clock ticking, even an agreement that satisfies everyone would still have to pass the Greek parliament. The closer that clock ticks to July 20, the greater the chance that the Greeks will exit the house of horrors and go it alone. This would be fine with Farage: “A euro exit is both inevitable and desirable in order for a long-term economic recovery to truly begin.”
Such an exit would be ugly and painful. Already contracts are being drawn up for the printing of the new Greek currency with British printers like De La Rue, which prints 150 currencies worldwide. It will either be the old Greek drachma or a new updated one, but, either way, it is likely to have half the purchasing power of the euro. And the changeover of the entire machinery of commerce, including ATMs, could take weeks if not months.
Such an exit is not without precedent, however. In 2008 iceland found itself in similarly difficult circumstances. Its three primary banks had borrowed and lent amounts exceeding eleven times the tiny country's gross domestic product. Iceland nationalized those three banks, forcing lenders to suffer a 100 percent loss on their holdings.
Its currency fell sharply in value, with foreign currency transactions coming virtually to a halt for weeks. Iceland's economy descended into a severe recession, with its GDP dropping more than 10 percent over a three year period. However, by 2011 the economy began to recover, with unemployment dropping significantly and the government deficit declining from almost 10 percent of GDP in 2009 and 2010 to just 0.2 percent in 2014. Writing in Spiegel Online, investigative journalist Guido Mingels noted: “Iceland, with a population of just 320,000, has staged what appears to be the fastest recovery on record … salaries are rising, the national debt is sinking, and the government has paid off [its] loans ahead of schedule.”
Even if Greece exits the eurozone, takes its marbles and goes home, there would still be much work to be done to repair the damage. Government spending would have to be slashed, impediments to small business startups would have to be removed, and the investment climate changed to invite foreign investment capital back in again. With Tsipras, a hard-core leftist, and his finance minister who sports a degree in Keynesian economics from Oxford still in place, the free market is going to get short shrift.
But getting out from under the tentacles of the Eurocrats would be a good beginning.
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Sources:
Nigel Farage: Greece votes No: The European Union is dying before our eyes
The Telegraph: What happens next after the ‘No' vote in the Greece referendum
Financial Times: Greek banks prepare plan to raid deposits to avert collapse
Irish Times: Q&A: Where to now for Greece and EU?
USAToday: Greece votes ‘no': Now what?
The Guardian: Eurozone struggles to find joint response to Greek referendum
Politico: The next Greek crisis: gas shortages
Background on Greek debt crisis
History of Icelandic financial crisis from 2008 to 2011
Spiegel: Out of the Abyss: Looking for Lessons in Iceland's Recovery
The London Times: Farage named 2014 Briton of the Year
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