Greece: taking the Euro out of Europe?

Europe's oldest civilization is again guilty of exerting undue influence on the European continent. With its economy accounting for little more than two percent of the twenty seven nations Eurozone gross domestic product (GDP), Greece has still managed to throw Europe into a crisis.

In the past, currencies were often supported by a precious metal such as gold

Some argue the Greek debt crisis is a 'Black Swan' event: a high-impact, rare and hard to predict event. Critics retort the Greek debt crisis is a Black Swan event only to ostriches!

The public sector accounts for 40% of Greek GDP. In 2008, the Greek debt to GDP ratio was 98%. Greek government spending and the public sector involvement in the economy have a fairly consistent history. The public sector employs a disproportionate amount of Greeks. They tend not to work hard for the (relatively) short periods of time they attend office.

It will not surprise many to know that even in the best of times the Greek Drachma was not one of the world's most revered currencies. Is it Greece's fault that the future of the Euro currency has reached today's delicate stage? Yes and no.

Yes, Greece is the most problematic nation among the high spending European PIGS (Portugal, Ireland, Italy, Greece and Spain). Critically, Greece's problems have surfaced sooner than the other nations. What is essentially a Euro currency crisis has conveniently transformed itself into a Greek crisis.

No, because it is a Euro crisis. The Euro, by definition, is European.

The Euro is a political construct imposed upon twenty seven diverse economies. Although the trade flows of the economies are well integrated, the labour markets remain rigid.

The Eurozone is no US. Few workers will up and leave from rural towns in Greece and Italy for jobs available in France and Germany. The US worker finds it reasonably easy to migrate from his home in Tennessee to work in Alabama.

By contrast, the average worker in, say, Greece, Spain or France typically speaks only his mother tongue. He is not 'interchangeable' with his counterpart in other countries. Cultural differences pose additional barriers.

Yet, a large part of the blame must lie with the advent of paper currencies. Currencies issued by countries with no underlying asset support, only a government's good faith.

Faith is fine as far as religion is concerned but money is altogether another matter. Many people don't place much faith in governments' anyway. To be fair, most governments' have fiscal and taxation policies which are not worthy of much respect.

The international economy has become a merry-go-round.

China makes stuff. The world buys the stuff using US Dollars. The US prints US Dollars as it no longer sells enough stuff to buy Chinese stuff. The Chinese take the Dollars only to lend them back to the US, via US Treasury bill purchases. The US buys more Chinese stuff.

Countries without the privilege of printing money run out of US Dollars and resort to borrowing from international banks. Banks are not repaid when these countries default. No problem; the US prints more to 'save' the financial system.

Similarly, banks 'sell' the default risk to other banks until all risk magically disappears. The risk miraculously shows up again (AIG?) when a default occurs somewhere in the pipeline. Again, no problem, let's print some more US Dollars and save the system. And so on.

It's a cynical view of the international system but we are at an inflection point.

The Greek Drachma: back to the future?

The present recession is structural not cyclical. The post war Bretton-Woods system is broken. A new paradigm is evolving. A paradigm being defined by Beijing as much as Washington. Frankfurt and London may attempt to protect their interests but Athens is a sideshow.

Neither I nor geomancers can predict the future shape of the financial system. One can only state that it will be radically different from the last few decades. In the interim, short of keeping gold bars underneath my bed I have no choice but to have faith in the present system.