Two years ago, I interviewed Bernard Connolly about the eurozone. Given the title of the book he published 20 years ago – The Rotten Heart of Europe – I wasn’t expecting him to be much of a fan of the way things were going. But it was still sobering. The people who built the eurozone cared nothing for economics, said Connolly. They cared only for politics.
The idea from day one was to put in place a mechanism that its architects hoped would eventually force full fiscal, and hence political, union, however painful that might be financially.
Connolly reckoned it couldn’t work. It would never be possible to homogenise enough, and without currency movements to reflect that fact, the less-productive countries would be caught in an endless spiral of internal devaluation – collapsing wages, falling living standards and rising unemployment – which quantitative easing will only cover up for so long. It could only work if Germany was prepared to keep transferring money to the weaker economies – which its population just wouldn’t be.
Worse, the attempt to homogenise economies and force political union would, said Connolly, result in social unrest. People need to feel a sense of belonging to a group and having power within that group. If they don’t get it via their nation, they end up “viewing themselves as belonging to a religious sect… or a racial or linguistic group”, or holding more closely to their sense of nationhood than before.
That doesn’t tend to end well. Connolly looked right in 2013. He looks even more right now. Greece has found itself in exactly the downward spiral he saw for it, Germany is kicking up about the transfers, and it already isn’t ending well.
But one more point needs to be made. Many City experts are sanguine on ‘Grexit’. Everyone has had so much time to prepare, that the impact will be minimal. I wonder. Look to the Greek people. Capital controls have been openly discussed for several months. They had plenty of time to prepare. But there are still queues around every block with a working ATM. Prepared? Perhaps. But still shocked and behaving in ways you wouldn’t expect. Why should markets be any different?
So while others might not be worried about the impact of Grexit, I am – particularly given that it is hard to see what our central banks can do to deal with another crisis. As the Bank for International Settlements says, with rates already this low, they are out of ammo. What do you do about it? That’s not so simple.
Firstly, I’d suggest a holiday in Greece. If there is anything they need now, it’s cash. So take lots and spend it. Then remember there is a world outside Europe. This week, David C Stevenson has finally come round to my way of thinking on Japan and, of course, our Roundtable participants have come up with their usual range of interesting investment ideas. Cheer yourself up by reading those.