A Nordic Lesson for a Mediterranean Basket Case

Viking, Grexit, Economy, Collapse, Recovery

The Story so far….

On the 25th January 2015, the Greek electorate went to the polling booths to cast their vote on the future of their sovereign nation. After years of austerity and public spending cuts, an angry and disillusioned public gave the left wing outfit Syriza the mandate to stir the pot at Europe’s top table.

That stirring of the pot has turned into an all out ‘Hell’s Kitchen’  affair which is surely now, going to end in Greek exit (Grexit) from the Eurozone and a default on ECB loans.

So what is likely to happen should Greece exit the Eurozone?

Evi Pappa, an Economics professor at the European University Institute, Florence, was asked about the ramifications of Greece leaving the common currency. He pointed at 3 likely results of  a Greek exit.

  1. Inflation
  2. Devaluation
  3. Banking collapse

I am going to examine each of these predictions from the perspective of Nordic Economic precedence and try to piece together a possible recovery strategy for Greece.

Currency Devaluation and Inflation

There is no doubt that a changing currency will lead to devaluation which in turn will cause an increase in the price of imports. Greece operates an open economy which  may offer some threats particularly because of a balance of payments ratio that is in the red.

The balance of payments ratio is calculated by weighing up imports vs exports. In Greece’s case that ratio is 27.57 billion worth of exports versus 46.86 billion imports.  Not quite 1:2 but the wrong side of the scales for economic independence.

Export Led Recovery

The decreasing Dragma should help Greece at least stimulate export activity. For a reminder of an export led recovery, in the face of economic disaster, let’s cast our minds back to Finland in the early 90s which faced an economic depression when the tail end of a boom during the 1980s overheated the Finnish economy and brought the country to its knees.

Finland devalued their currency in 1992 through 1993 and stimulated growth in exports. Their main trading partners among others were Russia. Greece also have strong trade links with Russia, in fact the Russians are their biggest import partner.

Greece’s largest export partner are Turkey which although are facing into a downturn economic outlook, is still growing with 2014 growth figures at a modest but respectful 2%.

Getting that balance of payments to a surplus will at least help to curb the hyperinflation that Greece faces.

Drachma, Greece, Economic Recovery
The Drachma is one of the oldest currencies in the world and dates back to 1100bc.

Cheaper produce coming from Greece will boost exports for sure. More trade will mean more jobs for Greeks which should improve the improve an unemployment figure which stands at 25.8%.

Banking Collapse

Greek banks will collapse, so what, let them. They lent badly prior to the economic crisis and now they will pay the ultimate price for their recklessness.

Recapitalising banks is what caused Global austerity in the first place. Governments have been ransomed with servicing banking debt most of which was accumulated during derivative lending and housing market speculation.

A banking collapse, we are told is an economic nightmare, no money in atms, business closure, societal breakdown. In reality, those situations are short term and are never as severe as predicted.

Let’s cast our mind back to September for our next Nordic Economic lesson. In late September 2008, two of Iceland’s pillar banks  Landsbanki and Glitnir were placed  into receivership in emergency measures by the Icelandic government to prevent state bankruptcy.

The result was a rapid recovery by Iceland so banking collapse may not be such a bad thing after all. Expect armageddon scenes for a few months but the long-term outlook could resemble an Icelandic style recovery.

Icelandic Banks, Failure, Closure
It was business as usual for Icelandics after Glitnir’s closure.

Greek banking failure will have huge knock on effects for European banks as some 240 Billion has been lent to date by the Troika in rescue packages.

For outside investors, those who owe the Greek banks or have invested in Greek government bonds will get burned. But that is the nature of markets.

Final Thoughts

Although I accept that these theories maybe optimistic, one must remember that Economic projections are often idealistic in their inception. In Economics, it is important to look at the past for a vision of what the future might bring.

Greece is facing a period of Economic Armageddon but I feel that recovery is possible and who knows, they may even come out the other side stronger.

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