Disagreements In Europe

The Eurozone has approved a bridge loan of 7 billion euros to Greece. The prevailing belief is that it would allow Greece to meet its emergency needs and debt payments, and avoid insolvency.

But is that really the case?

Klaus Regling, Chief Executive Officer of the European Financial Stability Facility and Managing Director of the European Stability Mechanism, told Germanys ARD television earlier today that a failure to reach a final agreement would mean the collapse of Greece’s major banking system, and that if Greece’s major banks will collapse, there will be dire consequences, not only for Greece, but for the Eurozone as a whole. The German minister of finance, Wolfgang Schäuble, said he still believes that it is better for Greece to leave the Eurozone temporarily to get debt relief.

After the Greek parliament approved the austerity measures arising from the European Union’s plan to help the debt-stricken country, the ball is now with the financial ministries of the European Union – who have to approve the third rescue plan offered to the country on their part as well.

It is needless to mention that the situation in Greece is very sensitive at the moment. On Wednesday, protestors confronted the police, throwing Molotov cocktails, while police responded with tear gas. One of the protestors even carried a sign that said Merkel and Schäuble will never swing another Nazi flag on the Acropolis. Protestors claimed that the current austerity measures are worse than the ones the Greek people refused before.

The shameful agreement terms the Greek parliament agreed to include: pension reform, raising the retirement age, changes in tax and banking systems, and automatic budget cuts, and is not promising any help, but will only serve as a precondition for negotiations on debt restructuring. This is obviously an important point to emphasize, since the arrangement may prevent the collapse of the Greek banking system, but not much beyond that. It mainly explains what Greece should do for creditors to even talk to them about a solution to the debt crisis. And in any case, there will not be debt relief. Just to clarify who is the boss, the agreement also speaks regarding the micro level. Greece is required to force the opening of business as usual on Sunday, to change the regulations on pharmacy ownership, as well as the licensing rules for the sale of bread and milk. Europeans are getting into the guts of the Greek economy. What about the reforms that the Greek government wants to convey? These will need to obtain the approval of the creditors.

The worst part of it all is that Greece is required to privatize. During the past five years, Greece has managed to privatize assets worth 3.2 billion euros. Now it is required to deposit assets, as “valuable” as no less than 50 billion euros with the designated Privatization Authority. Suppose a miracle will happen and Greece could find enough assets to privatize and suppose that Greece will also successfully sell them – where will the money go to? Mainly to creditors. 75% of the funds from privatization will be used to refund the extraction and reduction of debts. Only 12.5 billion euros will be used to invest in the Greek economy. Europeans, on their part, guarantee up to 35 billion euros to help Greece during the next five years.

Greece could quite possibly find itself outside the Eurozone. It is required to implement far-reaching measures that it can’t guarantee to pull off, nor on the dictated schedule. Schäuble’s dream is not dead. Even if Greece will not leave the Eurozone, there is no doubt that Germany has managed to instill fear in the rest of the member countries.

Sad to say, but Greece has stopped talking about money a long time ago, so there is perhaps a bigger conclusion. Some years ago, Prof. Dani Rodrik coined the term “The globalization Paradox.” According to Roderick’s analysis, it is impossible to combine democracy, nationalism and openness to the global economy. The reality of the 21st century shows that one of these elements must give. Yesterday, you could see this paradox in action. In the current round, it seems that democracy lost.

The markets are trembling, investors do not know where will they find a safe haven, whether it’s indices, commodities, stocks or foreign exchange. The market instability is outrageous. The euro fell against the dollar in more than 250 pips in the last days, and it seems that we are not far from the moment when the euro will be equal to the dollar.

EUR/USD Hourly Chart

The crushing of the euro has nothing to do with the actual status of the economy. It’s just that democracy has recently died in Greece, and people nowadays would rather not invest in dictatorship.

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