I recently spent several days with some Germans. I asked them what the response of the German people was to the nearly $1 trillion fund created to initially bailout the Greek government. They said that the German people were incensed.
The reason that they were irate was that they perceived that they were being good citizens and had saved their money and lived within their means. They view the Greek government as profligate and has lived beyond its means for years perhaps even decades. They wondered why they were being effectively punished for the profligate ways of their neighbors. Why weren’t the employees of the Greek government paying for the fact that they had been living way beyond their means.
Of course, the Greek workers would respond that it wasn’t their fault that the Greek government overpaid them all these years.
I think that this situation has several key ramifications:
- Angela Merkel is going to suffer politically. I think she will suffer enough to threaten her mandate but not enough to throw her out of office. Of course, if a lot of money has to flow to Greece or another country then she will suffer even more.
- The euro will have a background bearish factor. Will it survive? I believe that it should be broken up. For example, in the old days, Greece would simply devalue their currency to solve this crisis. However, they cannot do that in the current situation. But there is pressure on them to leave the euro so that they can devalue.
- In addition, we may see pressure on the Germans to leave the euro. My friends say that will never happen because the Germans don’t like change so they will do what they can to keep the euro together.
- The european economy will suffer as borrowing costs increase. That will likely cause higher deficits in european countries or higher taxes or lower spending.
- This will also decrease the value of european stocks so look for a background bearish tone.
- Gold will gain strength due to thinking that gold will be a safe haven. I think this will be particularly true because the US dollar is not that attractive. In addition, europeans have long history of gold ownership as a safe haven.
- The Greek government will be thrown out of office. The austerity program theoretically being put into place will cause a huge political backlash. I’m not sure that the government will really put it into place because that means that the current government will get thrown out of office.
It is critical to continue to watch this story. We need to see what happens in Greece and German but also all the other european countries that are also severely over-leveraged.