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Home >About Us >In Focus >Economy >Europe
Europe

Greece — A Test Case for Europe

Joy Bolli, Online Publications

19.02.2010 Greece, Portugal, Spain and other euro zone members have massive public deficits. What does this mean for the euro's future? An interview with Giles Keating, head of Global Research.



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Joy Bolli: Giles, how is the current situation in Greece affecting the euro?
Giles Keating: It's one of a number of factors that are tending to drag the euro down against the dollar. More generally, difficulties in one or two credit areas around the world – such as Dubai – tend to be bad for the euro. But clearly, the problem in Greece, which has made investors nervous, has resulted in a safe haven flow out of euros and into dollars.

Politicians have not come up with a concrete plan to solve the situation. Will the European Central Bank have to bail out countries like Greece, Portugal and Spain in the future?
Politicians in France, Germany and elsewhere have signaled that they'll provide some kind of back-up support, but only when Greece has really taken tough measures – possibly more than they have done already – to get the deficit down. Although that may be unsettling to some investors in the very short term, it's clearly good news for the euro in the longer term. Why? Because France, Germany and the other big countries are saying they're not going to write a blank check. They are going to require Greece, and indeed any other country needing support, to put its own house in order before receiving support from the others. This refusal to write a blank check bodes very well for the stability of the euro in the longer term. By the way, the European Central Bank is technically subject to the EU treaties. It is not allowed to bail out Greece. So it would have to come from the other countries on a bilateral basis.

How high is the risk of payment default for Greece?
Very very small, though one can never say zero. Indeed, one can never say there is a zero probability for any event in the financial markets. But the whole point about the political signals we've seen from the other countries is that although they aren't writing a blank check, they are determined to avoid any kind of outright default.

Some analysts say that Greece is a test case for the European Union. What are the possible scenarios?
The current events surrounding Greece are leading to the creation of a kind of model. This will provide at least a broad framework should other countries in the euro zone get into trouble. Portugal, Spain and Ireland may be affected, as well as Italy to a lesser extent. Hence, the Greek case is very important. It's about creating a system offering some kind of residual support for weaker countries.

The euro encompasses strong economies like Germany and France on the one hand, and weak economies like Greece on the other. How can the European Union master this imbalance?
What recent events have shown us is that France, Germany and the stronger countries are prepared to underwrite deflation in the weak countries, but not inflation. If they'd offered support before Greece had taken tough measures, then that really would have been allowing Greece to take an inflation route. As it is, by insisting that Greece cuts the budget deficit, reduces wages, gets down prices – with limited support if this leads to severe economic problems – France and Germany are in effect underwriting deflation. That is a recipe for stability in the longer run. And by the way, it's a problem that any large currency area has to face. The US for example has stronger areas, as well as weaker ones, like California at the moment.

Experience shows us that there is opportunity in every crisis. Where are the opportunities for investors to be found in this Greek tragedy?
Opportunities are both local and global. Locally, some investors are now looking at Greek bonds (the prices of which have fallen very sharply during the crisis) and wonder if they are now starting to offer value. As with any investment strategy, a judgment has to be made as to whether the situation will stabilize, but once this begins to look more and more likely, a case can be made for some of the bonds at lower prices. These have fallen and now offer value. We can extend this to a number of other asset prices that have fallen during the crisis. We're talking for example about some of the bonds in other European countries like Spain.

But we're also looking globally at equity prices that have fallen generally during the crisis as well as – as we said at the beginning – the weaker euro. Taking this view from here, the worst of the crisis is now over and things will begin to stabilize. There will however be a risk of recurring bouts of instability from time to time, when some of the markets which have sold off can recover. We see this current weakness in global stock markets as a nice entry point for the longer term. Stock markets are still trending upwards, even if it's a much bumpier and a more limited ride that it was last year.
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