Greece Stands Toe-to-Toe With Germany Over Austerity

greece and germany battle over austerity

What do you do when you know you can’t win?

Better still, what do you do when you know you can’t win, but you also know your opponent cannot win? And to take it to the ultimate end, what do you do when you know you can’t win, you know your opponent can’t win, and you know that you and your opponent both realize that both of you are in no-win situations?

You bluff. You bluff like your life depended on it.

Welcome to Greco-German wrestling, the economic edition — a game in which Greece and Germany hurl epithets at one another, threaten all sorts of measures and countermeasures to gain an advantage, but which will end with neither side getting what they want.

For you and me, this wrestling match presents an opportunity to profit in European stocks.

Greece and Germany — and I use “Germany” as a proxy for the European Union — are once again at loggerheads over Greek austerity and the kajillions of euros that Germany has pumped into Greece in recent years to keep the socially and economically dysfunctional nation from sliding off into the Aegean and sinking into the history books.

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Greek citizens with their recent vote for the Syriza Party have hired a brash new president and his swaggering finance minister to stand toe-to-toe with the Germans. Their marching orders: To brazenly tell those Krauts that the Greeks are done with all this austerity crap and to renegotiate the debts Greece owes, renege on many of the austerity measures Greece promised to follow and to wipe away most of Greece’s massive debt load.

The fear of another Greek drama that leads to a Greek exit has left investors incontinent. They clearly worry that a crisis will erupt like we saw in 2011/12 that saw European stocks plunge 30% in less than five months. So, with every media report they flee or rush back into European shares.

That’s our opportunity as investors.

You should take some chunk of your investable cash and direct toward European shares through an exchange-traded fund (ETF) such as the low-cost iShares MSCI EMU ETF (that’s a lot of letters; it’s basically an ETF that tracks the European Monetary Union). With every sell-off, add a little more to your position. In the end, you will own a nice stake in euro zone economies that will rally once the Greco-German wresting match is over.

The Great European Conundrum

So the big question: Why, Jeff, do I want to own Europe amid this mess?

Because neither side can win, and they both know it — and when that ultimately plays out, Europe will go back to normal and European stocks, now cheap relative to overpriced U.S. shares, will outperform American stocks.

The Greeks cannot abandon the euro, and Greek polls show that Greeks in large — large — numbers know this. Doing so would be disastrous. The new Greek currency would plunge relative to Europe, China and the U.S. Payments on Greek debt would spiral beyond the government’s ability to pay, so Greece would collapse into default, crushing Greek citizens who would be unable to retrieve money from a banking system in chaos … and with the money they do have would be incapable of affording goods that are suddenly expensive beyond measure.

Greece does not want this. Nor does Greece — and I mean Syriza, specifically — want to default on its debts or even wipe them away (which would be default as well). That would destroy Greece’s ability to borrow at affordable rates for years.

But the Germans are in no stronger position.

They cannot afford for Greece to leave the euro zone. A Grexit — as a Greek exit is called — would raise questions about the legitimacy of the euro zone and the currency.  And Germany must have the euro zone in place to maintain the fuel that drives the German economic miracle. Without the euro, countries all across Europe would not be able to afford German products because the currency disparities would make German goods too pricey in local dinero.

Plus, 70 years on, the Germans remain wracked by historic guilt for the actions of their ancestors in tearing apart Europe. Don’t think those emotions are not prominent — if unspoken — in all of this.

Finding a Compromise

What we’re likely to see ultimately is a situation in which Germany renegotiates Greek debt, probably stretching the repayment schedule out decades into the future. It might even become “century debt” that the Greeks finally repay sometime after the year 2100. That will reduce the financial pressures on Greece today and allow the country to invest in rebuilding the economy.

In turn, the Greeks will agree to, once and for all, shut up about the debt burdens imposed on them for, well, being Greek. As much as the Greeks like to blame the Germans for the austere situation in their country, the real blame falls at the feet of the millions of Greeks who have systematically and continually screwed over their own country.

With a debt-restructuring, Syriza can claim victory by saying it stood down the Germans … and the Germans can claim victory by announcing it will recoup every last German euro it loaned to the Greeks.

The game will be over … and European stock markets can stop worrying about whether Greece is in or out. It will remain in. End of story.

Until next time, stay Sovereign…
Jeff Opdyke Sovereign Investor
Jeff D. Opdyke
Editor, Profit Seeker