European Gauge

In 1948, US implemented The Marshall Plan to aid Europe, in which it gave $13 billion in economic support over 4 years to help rebuild European economies (remove trade barriers and modernize industry) after the end of World War II. However, the first aid went to Greece and Turkey in January 1947 under the Truman Doctrine, which were battling against communist expansion, even before the program was formally initiated. From then till the end of the cold war US continued to provide defense support to Greece. Post the collapse of the Soviet Union, the single currency came into place in a few years. The threat of Russia had dissipated and germanization of EU monetary policy allowed massive increases in spending capacity of EU countries, especially high inflation southern countries. This resulted in low interest rates for countries like Greece and Spain which had very different economies. And, what further depressed rates was the massive Chinese production increases at dollar pegged rates.

The European Coal and Steel Community to the current EU were essentially a political response to the repeated wars between France and Germany and was designed to economically embed Germany in Europe through market access. This market access with no exchange rate adjustment mechanism has resulted in the industrial engine of Germany, the 4^th largest economy in the world, building a ~8% current account surplus. Current account surplus is nothing but a manifestation of incremental saving over investments and lack of internal demand and raw material access has been a critical element of German geopolitical insecurity.  

With the European economy slowing substantially and inflation declining (and now aided by energy prices) post the global financial crises; ECB adopted various measures to keep the system on life support and more recently initiated quantitative easing (essentially financial asset purchases). The resultant impact is a substantial decline in the Euro, currently at 1.09 to USD from 1.4 levels a year back and expected to decline to 0.9-0.85 in the next 2 years. The real yields in Eurozone have already declined below Fed QE levels (10 yr bunds at 0.17%, France at 0.47% vs US at 1.19% and Japan at 0.35%). While this will play out in terms of helping export sensitive countries like Germany or Italy in the international markets and in terms of second order wealth effects due to increasing equity prices across the EU together which hopefully will lift investment, it however does not directly allow for adjustments within EU. The Euro-area countries also continue on their path of reducing fiscal deficits (e.g. Spain 5.6%, France 4.4%) or debt deflation and wage growth has stalled. In essence two aspects impact the Eurozone as always – (1) the overwhelming weight of the cost-effective German export engine; and (2) lack of adequate demand within Germany.   

The economic pressure has resulted in the rise of right wing political parties across the European Union like Podemos in Spain or the victory of Syriza in Greece. Along with the economic pressure, the geopolitical pressure of the European Union has multiplied with the reemergence of Russia (Ukraine conflict and increasing intensity of military exercises) and collapse of order in the middle-east, all on the eastern border of Europe.

The nation acutely reflecting the multiplicity of these pressures is the ancient land of Greece, birth place of western civilization, sitting on the south-eastern border of Europe.

Greece will likely be the first pin to fall under the economic constraints created by the Eurozone. As after WW II, Russia is awaiting this moment where it could have a toe-hold in the Mediterranean. This may also result in a very similar response where EU or the US steps in to prevent the same under a national security paradigm. But this response will alter the complexion of EU. Grexit will raise the gauge pressure to critical levels and EU which in many ways was cajoled together by the US as a geopolitical response post World War II, will be taking a step towards the known unknown…national interest first but path uncertainty may finally make it otherwise.

“Europe and the euro zone have no reason, rationally, to push Greece out of the euro. But this is a system in which many parties, many countries, many governments, many electorates participate and we could have events which, rationally, are not controllable.” – Greek Politician

“The Europeans are still human, and they will encounter terrible choices like those that others face and that they have faced in the past. They will have to choose between war and peace, and as in the past, they will at times choose war. Nothing has ended. For humans nothing significant is ever over.” George Friedman, Flashpoints, 2015