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Posted on Jul 7, 2015 in E.U., Elections-Non-U.S., Foreign Policy Issues, Greece, Merkel, Tsipras | 0 comments

A Grexit from the E.U., I doubt it! And we have a stake in it. If it happened it would hurt the U.S. badly.

 

It is very unlikely that the E.U. will allow Greek banks to go under with the possible consequences of Greece leaving. But seeming tragedy-about-to-ensue reports as both sides negotiate with the brinkmanship model in mind is likely to continue; more a la the countries on the other side of the Mediterranean than staid Germany.

The major world stock and bond markets (with spillover into the commodities markets) have shown the greatest reversals of the year as rumors abound, first suggesting, then rejecting, then suggesting again the possibility of a deal. Standard and Poor upgraded the chance that Greece would leave the E.U. to greater than 50 percent. Tomorrow (Wednesday), according to the latest rumor, Greece will meet with Germany, and presumably Margaret Thatcher-like stubborn Chancellor Angela Merkel, to make yet another proposal. A meeting Sunday with all of the EU’s heads of state rumor is also being floated.

We have also heard of a call by President Obama to Chancellor Minister Merkel today. Presumably this was to reiterate and reinforce the tactful, yet strong, message delivered by Secretary of the Treasury Jack Lew, last week, to Merkel, which not only urging compromise but pointing out our interest in a positive outcome.

On CNBC, the business channel, I’ve heard economist after economist, as well as various Eurpoean bank specialists, argue that Greece failing and even leaving the E.U. wouldn’t hurt them and the rest of the world. Greece has a relatively small economy.  They argue that the creditor banks have already protected themselves by establishing firewalls to minimize the negative effect of defaults and a Grexit.

I wholeheartedly disagree with them. There is more of a domino effect involved than a simple linear totaling up of immediate financial costs. If Greece goes, then the focus will shift to the other weak European economies: Spain, Portugal, Ireland and even Italy. This has shown up in the weakening of bond prices in those countries as the Greek crisis unfolds.

In the United States, a Greek exit would have profound implications in this era of free-trade. To begin with there is no such thing as an isolated economy. Europe is our largest export customer. The mainland Chinese stock market has declined 36 percent, in slightly over one month. A European hit right now just might be enough to tip our slow but steady recovery into a downward slope. There are immediate pressures on the Fed not to raise interest rates, something they have been expected by many to do in September. The head of the IMF has gone on record to the effect that they strongly recommend no increase by the fed at this time. Simply put with the extremely low rates in Europe, due to the weak economies in Europe (in Greece the unemployment rate is 25 percent), every raise in interest rates in the U.S. will have a corresponding effect of siphoning off, on the margin, monies from the European market–thus impeding their economic recovery tactics. If Greece were to leave the E.U., it could spell disaster for the so-called emerging economies, such as Brazil, and that, too, would seriously affect our exports.

So why am I cautiously hopeful? For one thing, everything I have said here should be well known by all the participants in this Greek tragedy. Egos aside, nations generally act in terms of their self-interest. To be sure there are domestic political concerns that European leaders will have to deal with, such as Germans being asked to retire three years later than Greeks, making it seem like the German worker is subsidizing the Greek worker. Tsipras has his large unemployment rate hanging over any consideration of more austerity measures. Even so, look closely and you will see all sorts of signs that the Greeks, even the leftist government (though perhaps not the smaller Communist Party) has given signs that they want to stay in the E.U.. Last Sunday’s Greek election, which many European spokesmen viewed as a vote against remaining in the European Union, was clearly described to the Greek voters by Greek Prime Minister Tsipras, rather as a vote to give his government a stronger hand in negotiating better terms with his European counterparts. Not to pull out. Perhaps more significantly, immediately following the election Sunday, Tsipras replaced his often intransigent and irritating Finance Minister, leftist academician Yanis Varoufakis, with the more temperate and conciliatory Euclid Tsakalotos.

A continuing roller coaster of a ride before resolution is very likely. Kicking the can down the road for a while with a temporary bailout in exchange for somewhat vague promises, possibly. But a total abandonment of Greece’s economy and a Grexit from the E.U., I doubt it.

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