The (Original) Sick Man of Euro

So, this morning the spreads (rate difference) between Greece and Germany’s debt increased to 1500+ bps (15%). Dow futures are down. European & Asian markets are all in red. Greece came to this point despite receiving $157 billion from IMF & EU last year.

Greece GDP (in nominal terms) is ranked 32^nd in the world. Well below Iran and Argentina. So why is world so concerned about Greece? Unlike the other sick nations of EU, Ireland & Spain, Greece doesn’t have any large, troubled financial institution that forms the backbone of its economy. So, what is the story of Greece?

Greece as you may all know is the ‘proud’ member of the European Monetary Union. It was one of the founding members. But since it didn’t meet any of the monetary & fiscal benchmarks (Convergence criteria’s) to make it to the Euro-zone, it had to wait for two years before it was finally inducted as the 12^th member of the exclusive club. It’s an open secret that Greece did a lot of window dressing with its accounting books to get qualified.

Robert Mondale, ‘Father of the Euro’, was against admitting Greece in Euro area because of its weak economy. But as always politics had the upper hand in European Union matters and his advice was disregarded. Fast forward 10 years and you see the reason why he didn’t wanted Greece to be in EMU. After all, Father knows that Best!!

Now, since Greece is one of there own, EMU policy makers, sitting in European Central Bank’s office in Frankfurt, are worried about the contagion effect. They are concerned that if Greece goes under, it will have a domino effect on economies of Ireland, Portugal, Spain and Italy, as there financials are very shaky and there banks have a good amount of exposure to Greece. Although, more importantly they are worried that it will weaken the ‘concept of Euro’, both financially & politically. Kicking out Greece from EMU won’t help either Greece or EU members. Because if Greece adopts Drachma again, it will be much more devalued and since Greece is not a big exporter it won’t have any impact on its revenue. Instead, it will increase its financial burden since its debt is denominated in Euro & USD. The devalued Drachma in turn, will directly impact the above mentioned struggling EU nations, since investors will loose faith in Euro and will ask for more interest on there debt.

As I write this Greek’s, American born Prime Minister, George Papandreou is in the process of proving his majority, so that he can bring in some harsh, much needed austerity measures. Greece’s road ahead is not very smooth, but that is the only way out. The nation that gave the world the lesson of Democracy needs a lesson or two in Economics.