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Extreme Brinksmanship


Last week, the European Union developed a template to save Greece now and possibly other members later.  But, the Greek people felt they had been ignored and abused by the process.  So the Greek prime minister made a bold call to hold a referendum in January, forcing the voters to choose between severe austerity or absolute chaos, both ugly choices.

If the Greeks choose to remain members of the European Union, they continue to use the Euro as their currency and benefit from reduced trade barriers with other members.  They also agree to pay cuts, reduced entitlements, delayed retirements, and higher unemployment.  Importantly, they also agree to actually pay their taxes, a new concept for them.

If the Greeks choose to leave and return to the Drachma as their currency, the cost of all imports will sky-rocket, as the Drachma would plummet in value immediately.  Exports would suddenly decrease dramatically (before rebounding after a great deal of damage).  The courts would be jammed on how to enforce legal agreements denominated in Euros.  The country would experience a heart-breaking paralysis.

Of course, this is not set in concrete.  Their prime minister has a no-confidence vote on Friday.  This decision to hold a referendum may well be a campaign tactic, which could be reversed immediately.

Another benefit of announcing a referendum is to increase the negotiating strength of Greece.  This current deal was largely crammed down their throat.  When the Greeks choked on it, world stock markets tanked, and nobody wants to go thru that again.

So, the decision to hold a referendum was good for the prime minister in the short run and good for the Greek people in the long run.  Political cynics would call the move “brilliant.”

The European markets are relatively flat this morning, and futures indicate the Dow will open up about 90 points.  Let’s pray the referendum is cancelled on Monday, so we can resume healing . . .

In a normal environment, we would be focused on the all-important Jobs Report this Friday, but this is not a normal environment, unfortunately.

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