When Eurolander Meets Eurolander Bearing Gifts

My brief analysis of the Greek war of Interdependence and what it means for equity markets.

Even without the urging of Spartan women, manly Greek government officials have taken the war to the enemy. It is thrilling to see Greece invoking the spirit of its ancestors and living dangerously on the cliff edge of democratic civilisation. What is the too well fed establishment of the modern European Union, compared to the foot soldiers and cavalry of a Persian Empire? Not very much it seems. The Greeks recall Darius and the Persians as if it were yesterday.

The Greek ‘No!’ is like something from an heroic age that has come crashing -like the charge of the Light Brigade, when Britons though of  themselves more ancient Greek than modern industrial Victorian – into our modern times of politically spun compromise and political evasion. Who said that time travel was only possible in episodes of Doctor Who? Modern Greeks, like so many new Alexanders, found a Gordian knot and just cut through it.

The Europe Union is not an empire of which our modern Greek Dentist yearns to be free but one which he wishes to re-conquer in the name of the people (admittedly Greek people) and democracy. And of course, they have a point. If Greece were Liverpool (when it was the mal-administered part of the UK “grotesquely” sending out P45 dismissal notices by taxi) it would expect national surpluses to be directed towards it by central government, as a failing part of the national economy. That is how sovereign economies work. The transfer of surpluses and deficits is part of the plumbing of politically and economically efficient nation states.

But that is the problem. The European Union is not a sovereign nation state and does not have the plumbing of appropriate constitutional arrangements for dispersal of funds throughout its domain; like the Barnet Formula. That is the big problem. The EU association has no proper constitutional clothes. The Euro is not the national currency of a nation state but merely the currency unit of a free trade association of sovereign member states, who share it by treaty only.

Something the Greeks signed up to have and the British did not. In the EU a German is still German and a Greek still a Greek. They do not have a constitution which makes them “Eurolanders” with mutual duties and obligation governed by one Treasury as one citizenry.

Germany generates surpluses which need to be circulated to the economically soft underbelly of Europe without the expectation of their repayment, like foreign bank loans. The European Union cannot have its cake and eat it!  This Greek revolt in the name of democracy will focus the minds of Europeans on the task of integrating its banking and economic systems under one Ministry of Finance and under one Central Bank with the kind of levers of control available to other central banks. Brussels has been promising to do that for several years but dragged its feet. Greeks and many Europeans want to go in that direction just as many in Britain wish to travel in the other direction; away from the nation state of Europe.

I think that the Greeks will remain in Europe and the Euro because that is what politicians everywhere – except in Moscow- want.  For big geo-political reasons the US want the Greeks tucked safely inside a big Western Europe, away from that naughty Mr. Putin and his military. It’s what the Greeks want. They have been out on a limb for too long. It’s what German industrialists want, because means no currency barrier to its exports to the rest of Europe where it sells 40% of its production as well as helping to keep the Euro nicely soft for competitive German exports to most other places.

It’s what the British will be happy to support as a bargaining chip to itself becoming a much freer, semi detached member of the trading group. If everybody wants the Greeks in then it will mean concluding the construction of a more politically, constitutionally, federal Europe.

If parts of Europe grow more slowly than other parts, that’s pretty much what happens everywhere where surplus regions get their surpluses transmitted to economic laggard regions. European governments have got to bite the bullet on that painful necessity now, unless they are willing to abandon the Euro, which I doubt they are. Getting rid of Greece will not cure the problem so far as the smaller, less prosperous European states are concerned. An independent Scotland could perhaps get a new Barnet formula named after a northern suburb of Brussels or Berlin; or wherever the Federal European government will be located.

Germany has a GDP of some $3,634 billion on which it currently earns an annual trade surplus of 7.5% or $270 billion. As everyone knows, that has to be spread around as commercial demand or transfer payments in Europe, for the benefit of other “Eurolanders”.  That will greatly help the Greeks who, once they are fully fledge citizens of Federal States of Europe, will no longer be foreign borrowers but legitimated recipients of Federal transfers who will be governed by the Federal Treasury budgets of departmental spending; the kind of relationship you see between Louisiana and Washington DC. That is the only game in town for the European Union apart from getting rid of the Euro and keeping the whole thing as a lose Trade Association of independent nations, as the UK would wish. There is a slim chance of that but it looks too slim to see.

Ever greater union is already work in progress. The Greek War of Interdependence will ensure its completion. I expect the Euro to strengthen in the longer term. It is not something I wish Britain to join. But psychologically and by chance of history, our government has a golden opportunity to opt out of a lot of stuff; except of course the free movement of people which is the real sticker. Moreover, it is likely to all come unstuck again in fifty to a hundred years time and who wants to be part of that?

In short, I am not one of those made bearish about the market by this wonderful Greek revolution. I see no great weakness of the Euro as a result. Some uncertainty but not a lot.