Rumors, Denials, and Visions of Chaos in the Eurozone

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While the G-8 leaders are schmoozing with President Obama during their slumber party at Camp David, and while the parallel NATO summit and its protests and rallies are wreaking havoc on the streets in Chicago, Europe is re-descending into rumor hell—where good rumors, as we found out last summer and fall, are head fakes that cause huge rallies in the markets, and where bad rumors, though passionately denied by all sides, turn out to be true.

The latest was that the European Central Bank and European Commission were preparing contingency plans for Greece’s exit from the Eurozone. Actually, it wasn’t even a rumor. EU Trade Commissioner Karel De Gucht declared it during an interview: “A year and a half ago, there may have been the danger of a domino effect,” he said, “but today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn’t make it.”

A momentous statement. The first time ever that an EU official admitted the existence of contingency plans—though everyone had long assumed that they existed. Clearly, Europe’s political power brokers, disparate as they are, have gotten tired of bending to Greece’s wily political elite and their threats.

Alas, within hours, the very European Commission where De Gucht serves as the Trade Commissioner stabbed him in the back: “We completely deny that we are working on any such emergency plans,” said a spokesperson for the Commission. “We are concentrating all our efforts on supporting Greece and keeping it in the Eurozone. That is the scenario we are working on.”

Indeed. And then there was the rumor about printing money. Not the kind that the Fed, the ECB, and other central banks are printing, but real money. De La Rue, a British company that prints currency for 150 countries, among other business activities, has apparently been asked some time ago to prepare contingency plans for printing Greek drachma notes, according to unconfirmed rumors that just surfaced. People who got wind of it earlier have driven up the stock (DLAR.L) 11% since mid-April—possibly a confirmation.

Greece’s return to the drachma can’t be done overnight. It would be a complex and costly transition that would require time. The day Greece switches to the drachma, it will have to have huge quantities of drachma notes on hand; and preparations are apparently underway to print them. The Bank of Greece has its own printing outfit that has been printing euros ever since it stopped printing drachmas. It would pick up much of the volume, but any demand beyond its capacity would have to be farmed out to other printers. Hence De La Rue.

Banks have already been preparing for the drachma. Turns out, some banks never actually removed their drachma capabilities, perhaps because they lacked confidence in Greece’s ability to keep the euro, or perhaps because they—the banks, not the Greeks—were simply too lazy. And they’d be able to switch from one moment to the next. But it would still be a complicated mess laced with capital controls and all the banking nightmares associated with them. It would be fraught with risks, legal issues, and uncertainties.

A return to the drachma—and its rapid devaluation—would do wonders, however, for Greece’s tourism industry, the second largest industry after shipping. In 2011, the number of international visitors actually rose by 9.5% from the prior year, and they spent 9.3% more. The industry is hugely important to Greece: it provides 18.4% of the country’s jobs and makes up 16.5% of the economy.

But now reservations for the summer have collapsed by a stunning 50%! “Political instability,” explains Georgios Drakopoulos Director General of the Association of Greek Tourism Enterprises (SETE). And bad publicity, strikes, demonstrations, and images of Athens on fire—the only things foreign media showed, Drakopoulos lamented, though in the rest of Greece, “the conditions are the exact opposite.” And once those issues disappear from the media, a devalued drachma would turn Greece into an irresistible and highly affordable paradise for tourists of all types, including waves of budget tourists—all of whom would bring in hard currency.

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  2 comments for “Rumors, Denials, and Visions of Chaos in the Eurozone

  1. Chriss Street
    May 19, 2012 at 8:46 pm

    From 2002 to 2007, there was much more inflation and growth in Greece and Spain than in Germany, yet both had similar interest rates. Greeks and Spanish real interest rates were nagative and encouraged a frenzy of borrowing for consumption. German interest rates were very positive, discouraging borrowing and consuming. The ECBs monetary authority could not tighten rates to cool Greece and Spain, because it would have created a depression in Germany.

    Now the Greeks and Spanish are expected to impliment auterity while suffering deflation. The result is sky high real interest rates that guarantee a depression. This is why the euro will fail

  2. Wolf Richter
    May 20, 2012 at 12:57 am

    Chriss – Good points. Let me just add that in Germany real wages declined for over 10 years, well actually in former West Germany since Reunification. In the 80s, Germans used to be among the best-paid workers around. Engineers made more in Germany than in the US. The adjustment, while tough, was spread out over two decades, and people got used to it gradually. Meanwhile, pay skyrocketed in Greece, which used to be a low-wage country, and certain other Eurozone members. While it felt good and bought votes for the political elite, it was unsustainable. But now, Greek workers are expected to suffer in one fell swoop the same fate that Germans (and BTW US workers) were able to spread out over years. It's going to be tough. And I doubt it can be done politically. So yes, the drachma and a steep devaluation might be considered the easier solution–and as soon as the bailout money dries up, the only solution.

    Germans are euphoric these days. Their economy is still humming — what a change from those years since Reunification when they were the "sick man of Europe." I don't remember ever having seen that kind of euphoria in Germany, except perhaps during the initial phase of Reunification. And they're plowing their money into a nascent construction and real estate bubble, and they're spending and buying cars with gusto, which will keep their internal demand high, even if exports take a hit, which they already are. So long as that euphoria lasts, they would probably want to keep the euro. If Germany gets hit economically, and if the Dax takes a 50% dive, I think they'll be open to anything.

    There are people out there that believe the euro will end this year. I doubt that. Greece will likely be out of the euro by year end, and maybe a couple of other countries might follow next year. But Germany and Austria (the mark and schilling had been linked for decades anyway), France, and some other countries will likely work hard to keep the euro, or some form of it. So, if you want to see the euro disappear as a currency, you'll need some patience.

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