Greece Rejects Austerity — What’s Next for Europe?

Academy of Athens.
© 2002 - 2015

The news is full of stories about Greece’s debt default, their “no” vote on an important referendum, and the chances of their exit from the European Union / “Eurozone”. The New Yorker has a pretty good example, with some significant commentary. Because this situation is unusual, neither the pundits nor the markets seem to know how to react.

Over the weekend, the futures markets for stocks plunged, predicting a dramatically lower opening on Monday morning — for markets outside Greece, where the stock market in Athens remains closed. But this morning, the US markets have recovered most of that, and European markets aren’t as bad off as they might have been.

So what comes next? And what will it mean for our clients?

International debt troubles are not new. The Delian League, founded to help the Greek city-states protect themselves against the Persians, nearly defaulted in 454 BC — and the “modern” Greek state has spent more than half of the period between 1800 and 2008 in technical default, unable to repay their debts and negotiating for extensions (here’s the history).

But this is not uncommon, especially in periods of dramatic economic and political upheaval. The German government today leads the demands that Greece repay its debts — forgetting, perhaps, that in 1953 its own debts (half from before WWII, half from after) were re-negotiated, and ultimately cut in half in “the London Agreement”.

When we dig to the center, though, and “follow the money”, we find that the politicians of the European Union (centered in Brussels), the banks of France and Germany (based in Paris and Berlin), and the bond markets of London and New York are all focused on Greece right now. The Greek referendum puts the European Union at a stark decision point: Retain Greece, write off its debt, and build a new set of economic and political institutions within the context of a stronger EU? or Repudiate Greece, force it out of the Eurozone and the EU, and risk losing the entire European Union project?

On one hand, we don’t know what will happen, though history (especially American history from the Civil War through WWI) might be a guide. Prior to the Civil War, there was no clear central banking system, and regional banks managed their own monetary policy. A series of financial shocks in the late 1800s and early 1900s brought attention to the disjointed state of the American economy, and resulted in the creation of the Federal Reserve — and a century later, we have a clear, coherent financial system. The EU hasn’t had very much time to solidify its system yet; the current crisis might just be part of that process. There’s a lot to think about here, and I will come back to the topic another time.

If the Germans force Greece out of the Eurozone, it increases the likelihood of the demise of the European Union. If Greece is retained, and their debts restructured without further austerity measures, the European Union will be fundamentally altered. Either way, Europe’s political and economic structures are bound to be reviewed and revised. Changes to the European system will certainly impact the world economy — but just how, nobody can predict right now.

On the other hand … Greece represents about 2% of the European economy, and Greek stocks represent about 0.2% of our clients’ total holdings. Bluntly put: We’re not especially concerned with today’s dire messages about the Greek economy. Spill-over effects into the rest of Europe are of more concern, and impacts on the US economy are a worry. But this is little more than a short-term shock to the system. Our portfolios are built to survive these temporary ups and downs.

And next week, the pundits and the markets will have digested what information we have about Greece, made some predictions about what the future holds, and moved along. The US markets opened this morning down a little more than 4% from their May highs, before rebounding. There’s a long way to go from here to a 10% “correction”, and that much further to a 20% “bear market”.

We don’t plan to make any drastic changes to our global asset allocation strategies, based on this short-term, small-scale change. As we’ve pointed out recently, our investment decisions are made with a prudent process, and with our clients’ long-term goals in mind. If your particular financial situation has changed recently, and you think that we should review your current financial plan, then please be sure to give us a call. And if you want us to dig into the details of your current financial situation, and work up a comprehensive financial plan, let us know.