What Happens In Greece Must Stay In Greece
Advisors Capital Management
By Charles Lieberman
June 18, 2012
Greeks has seemingly elected a leadership to work with Europeans to help
them balance their budget. Nonetheless, Greece is too dysfunctional a
country for another round of credit to accomplish much. It must become a
law abiding nation by paying taxes, it must severely reduce government
spending by decreasing social programs, including employing far fewer
Greeks, and it must restructure its restrictive labor and business laws
to enable firms to grow. This is asking a great deal of any country,
particularly one whose leadership has failed to articulate the need for a
major overhaul. Fortunately for the rest of Europe, Greece is a small
country. So everyone else must protect their banks and government from
contagion from Greece. We expect European central banks to become ever
more expansion oriented and European agencies to support Spain and
Italy.
The government likely to be formed in Greece still has the gargantuan
task of trying to balance its budget. This was always difficult in
Greece, a country where tax evasion is a national sport. Corruption is
endemic. A large fraction of the public lives off the state. Many
businesses are protected by anti-competitive laws that stifle growth and
hiring. This is not a sustainable economic model. But the necessary
change would be wrenching and it is not clear who can or would lead the
effort. The Greeks need to figure this out. They will be left to their
own devices to do so.
The rest of Europe needs to be sure that Greece’s travails do not become
contagious. Expect strong actions to be taken to support Spain and
Italy and banks across Europe. A 100 billion euro capital injection
into Spain’s banks has already been announced, which appears to be
roughly 50% greater than required. It remains to be seen how
aggressively Europe will force other banks to raise capital. But, this
must be done. Monetary policy is going to be the primary tool to
promote growth, since fiscal policy is severely constrained by budget
deficits. U.K. monetary policy is about to become far more expansion
oriented. The ECB is likely to lower rates soon. Emergency funding for
any other European nation will be made available. Equity markets
rallied last week, as investors could see that European governments were
lining up to prevent fallout from Greece from undermining their own
economies, regardless of the election’s outcome. Indeed, it is critical
that the rest of Europe makes progress towards growth and, eventually,
deficit reduction, but in that order. If so, what happens in Greece
will not matter much for the rest of Europe.
(c) Advisors Capital Management
