One of the best decisions I ever made was to do a postgraduate degree in Economic History. The context helped; the faculty at my alma mater approached the subject more as political economy than dry memorization of rates of capital formation.
Which brings me to Greece. When you look at the country’s situation from a financial market perspective — which is to say a short-term view — it’s no doubt true that markets have priced in a Greek debt default, so the recent election of an anti-austerity Syriza government isn’t as much to worry about as it would have been a few years ago. It’s also understandable to blame the Greeks themselves for getting themselves into this pickle with reckless borrowing and spending.
But from my “political economy” perspective of history, events in Greece are ominous indeed, and pointing fingers at the Greeks themselves isn’t going to change anything. Syriza is a wake-up call for Europe — and a call to action on your part.
The Center Cannot Hold
As the weakest peripheral economy in the euro zone, with a socio-political system no more robust than many “third world” countries, Greece is the place you’d expect a financial plague to start. As with any contagion, the health of the rest of the “herd” is critical to the spread of this plague.
Most privately-held Greek debt has been taken over by the European Central Bank (ECB) or International Monetary Fund, so financial infection isn’t an immediate problem. But the contagion I’m worried about isn’t financial — it’s political.
Across Europe, traditional modes of leadership and established institutions and understandings are unraveling. Hungary has basically turned fascist under Prime Minister Viktor Orbán. Marine Le Pen of the far-right, anti-European Union National Front leads the French presidential polls. Half of Italian voters appear to support anti-EU parties. European Exchange Rate Mechanism (ERM) countries across Eastern and Central Europe are reeling from the effects of the unpegging of the Swiss franc from the euro, since the tens of millions of mortgages in those places written in Swiss francs are suddenly 20% more expensive to repay.
A U-shaped cordon of EU and ERM countries surrounding the robust economies of Germany, Austria, and the Low Countries is in economic and, increasingly, political turmoil. Although the German economy itself is in good shape despite sanctions against Russia, countries such as Greece and Spain are reaching rates of unemployment worse than the U.S. in the Great Depression.
Voting for an “anti-EU” party is another way for European voters in countries like these to say they want to be able to do things that EU or ERM membership prevents, such as imposing immigration controls or deficit spending without running a trade surplus or external borrowing.
But I’m betting that they don’t really want to leave the EU or the ERM. There’s too much upside to a common European currency and market for capital, labor and goods. But that won’t stop populist European parties of the left and right from demanding solutions that have the potential to destroy those things, even if unintentionally.
Limited Options Spell Trouble
It’s crystal clear that Germany isn’t going to send money to Greece or other countries to help them avoid “austerity.” The Germans want such countries to repay the ECB in full, as agreed. But it’s also increasingly clear that voters in such countries aren’t prepared to live with severe austerity much longer.
That leaves only one possibility if Europe wants to stay together with a common currency and open borders but not a common fiscal policy. Someone’s going to have to come up with the money to fund a write-off of peripheral country debt.
That money is sitting in private bank accounts held by EU citizens all over the world. As in Cyprus in 2013, a mandatory euro zone “bail-in” would be as simple as typing “transfer 10%” on a banker’s keyboard. Of course, Europeans hold money outside the EU as well. That’s why the rapid development of a de facto international tax withholding system, which makes inter-jurisdictional wealth confiscation possible, is so ominous.
Ominous, too, is President Obama’s overnight proposal for a mandatory tax on overseas profits of U.S. firms, since it’s a stepping-stone to similar “one-off” taxes on individuals and domestic businesses.
Under circumstances like these, Europeans — no, scratch that, everyone — needs to take steps to transform some of their wealth into forms that are hard to confiscate, such as physical precious metal holdings in private vaults, rare collectibles or foreign real estate. There are good options available that allow even those of modest wealth to achieve this quickly and easily.
But the time to start is now. After all, the writing’s on the wall.
Offshore and Asset Protection Editor