One of my favourite comments on Europe comes out of Jim Rogers book Street Smarts (pp. 202-204)
After being highly critical about the intolerance to not respecting the Maastricht Treaty and its well-grounded purpose he wrote the following:
“The new guys were no preoccupied with being reelected, the demand of which were not well served by ridiculous fantasies like fiscal discipline. Right now, under any regimen, it will be impossible for many countries to pay off their debts. Ever. It is not going to happen. So, accepting that, what should Europe do? My solution is one the market has been imposing for thousands of years. Let them default. Let them go bankrupt. The people who are in debt with them, either by lending to them or investing with them, will take losses, serious losses in some cases, but then, for example Greece can start over from a sound base. The country need not leave the Eurozone to do it. We in America have had states go bankrupt, countries, cities –Mississippi did not pull out of the United States because it went bankrupt. Neither did New York, nor did Detroit. They went through a period of pain, people lost money, wages went down, rents went down, haircuts went down, everything went down as people adjusted to the reality that they did not have any money, that they could no longer spend money they did not have, and that nobody would lend them any money. But they prevailed. And nowhere along the way did the US dollar disappear.
Unfortunately, politicians in Greece or somewhere else will see pulling out the euro as the easy solution. The hell with the euro, we will go back to the drachma! And that would be a mistake. They may be a burst of enthusiasm at the beginning. Everybody will have this new drachma, and things may look OK for a while. But the optimism will not last. A return to the drachma will just serve as a license for the government to print money, and for the Greeks to continue spending money that they do not have. The drachma will trade at such a low price that the country will enjoy a much improved balance of trade, but everybody’s net worth will have collapsed. Nobody will trust the currency, or the Greeks themselves. Nobody will lend them money. Nobody will invest there.
There is no scenario under consideration, there is no scenario possible, that alters the fact that over the next decades people are not going to be living great in Greece. And all those people who have loaned Greece money are going to take big losses. If Angela Merkel could get all of them into a room and say, “Okay, this bank is going to close, that bank is going to stay in business, this guy is out of a job…all you guys are going to take hits, but we are going to hold everything together, everybody’s saving are safe, checks will be clear, depositors money will be protected, we will ring-fence the banks, the system is not going to freeze up and close down”, it might be different. If the chancellor of Germany could do that, the market would buy it, because at the moment (February 2013) governments in Europe have enough money. And they have enough creditability. If it happens five years from now, she can drag them all in into a room, talk to them all day long, and nobody will notice. The problem will be so bad by then that you are looking at systematic failure- the market says the hell with all of you, and the whole system collapses.
And in my view that is exactly what will happen, because politicians do not have the brains or the courage to take the necessary steps. None of them is talking about bailing out the Greeks. It is all about bailing out the banks, bailing out the management of the banks, the stockholders of the banks, and the bondholders of the banks who invested in Greece. The people of Greece will suffer but the banks will survive: the CEOs will make their salaries, the shareholders will get their dividends, the bondholders will survive. Greeks will be out on the street unemployed. They will be there either way. The difference is that my way things will eventually get better, as has happened in Iceland since 2009; the other way everything gets worse.”