Eurozone Greek Tragedy Turns Into a Farce as Grexit Looms Large

By: Money_Morning

Martin Hutchinson writes: The elections on May 6 only made the Eurozone's problems even worse. The French and the Greeks have rejected sensible policies in favor of self-delusion.

Those elections, and the failure of Greece to form a government, have actually moved the Eurozone crisis one step further - from potential tragedy into a complete farce.

As investors, we can only watch horrified, knowing that a really bad outcome would seriously damage our own wealth.

But at this point, a Greek exit - or "Grexit" as it has come to be known - from the Eurozone would be the best thing that could happen.

Confusion Surrounds the "Grexit"
The Greek election produced a very confused result. But one thing was clear: the Greek electorate has decisively rejected the rescue plan the outgoing government had so painstakingly negotiated with the EU.

The previous ruling party's joint support declined to just 32% of the vote. That might be thought of as just retribution, since those parties produced Greece's appalling fiscal mess by lying for decades about the true position of Greece's public finances. (And let us not forget being abetted by Goldman Sachs in doing so).

However, the winners were not some new paragons of fiscal responsibility and free market government. They were anti-German Nazis (a peculiar combination when you think about it), communists and a truly unpleasant new leftist party, SYRIZA, led by the 37-year-old Alexis Tsipras.

SYRIZA's politics, in that one can fathom them, spell nothing but trouble.

They seem to take the Argentine approach to governance - repudiate all your international obligations, spend like mad on the public sector, run xenophobic campaigns against your creditors, whine for more money from international institutions and, no doubt, nationalize anything that might be worth money.

Tsipras also made very sure no government could be formed so new elections must now be held June 17-- which SYRIZA is expected to win. Given the peculiar Greek electoral system, which gives 50 bonus seats to the winning party, Tsipras is likely to form the next government.

Yet if the EU authorities have any sense, they will refuse to negotiate with a Tsipras government and throw Greece out of the euro.

This would cause Greek living standards to halve, but would reintroduce the market into the Greek economy, allowing its viable sectors such as tourism to flourish at the new lower exchange rate.

If this had been done before Tsipras appeared, as I have repeatedly recommended, it would have caused about 6-9 months of chaos, after which recovery would take place and Greek unemployment would rapidly decline.

With Tsipras, the government will instead become bloated beyond belief.

Billions upon billions will be stolen, unemployment will stay high (although state make-work jobs and false statistics will hide this) and Greece will decline into genuine poverty-- since unlike Argentina it has few natural resources.

The Greeks will have brought this misery on themselves, but whereas a short sharp shock from a free exchange rate would do them good, and make them happier in the long run (since they would have productive jobs) one can only pity their miserable post-Tsipras existence.

More Eurozone Rubbish
The other possibility, however, is that the Eurozone authorities will mutter unhappily about their "democratic mandate" and allow Tsipras to neglect Greece's commitments to reform, while providing yet more money.

They will rationalize this by claiming that the cost of another Greek bailout is less than that of the breakup of the euro. That's rubbish, for two reasons.

First, it's a horrible precedent; every dozy populist in southern Europe will see the European Central Bank and German taxpayers as endless slush funds for their witless schemes, while promises of reform and cutbacks will be universally evaded.

Second, the cost of a Grexit from the euro just isn't that great.

We now know that the country has been run far worse than any other euro member. Italy has much smaller budget deficits, while Portugal, Ireland and Spain are making major efforts to clean up their act, with some signs of success.

Making an example of Greece, while providing loans where necessary to ring-fence the much better governments of Ireland, Portugal, Spain and Italy is still a viable strategy, provided France (which is in worse shape than Spain and arguably Italy) co-operates.

With Greece descending into impoverished chaos, the clamor from other electorates for populist overspending would be greatly diminished. Even in Europe, the smack of firm government can be made to work!

France could be a problem. The new Socialist President Francois Hollande has claimed he wants to relax austerity. He has however appointed moderates to his cabinet, with the new Prime Minister Jean-Marc Ayrault setting an example by cutting the pay of all cabinet ministers by 30%.

Hollande has also appointed the moderate Pierre Moscovici as finance minister who has described himself as a member of the deficit-cutting "serious left". It suggests that France, at least, will not follow the Greek road to overspending.

Thus, if the Hollande government avoids repealing the limited reforms President Sarkozy had introduced (notably, increasing the retirement age from 60 to 62) and does not increase income tax to 75% as he promised in the election campaign France will probably avoid serious trouble.

On balance therefore, we can expect a few weeks of turmoil followed by a Greek exit from the euro and relatively calm sailing thereafter, PROVIDED the Eurozone authorities hang tough.

Of course, that is not generally in their nature, but one must hope.

Source :http://moneymorning.com/2012/05/18/eurozone-descends-into-a-farce-as-grexit-looms-large/

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