Greek Democracy Could Be Costly

By: John Browne | Thu, Nov 3, 2011
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When the news broke earlier this week that Greek prime minister George Papandreou would seek a popular referendum on the bailout deal that had been so torturously negotiated over the previous months, financial panic quickly emerged. A "no" vote by the Greek people would likely lead to a partial dissolution of the Eurozone and could be the beginning of the end of the euro currency itself.

As it turns out, Mr. Papandreou's seemingly democratic gesture was more likely a political tactic to lure the opposition conservatives into sharing the political burden of passing the bailout deal. Although many of these conservatives had likely supported the bailout package, they kept their distance due to its extreme unpopularity on the street. They had seemed perfectly content to let all the political heat fall on Papandreou, who no doubt would have fallen when the deal took hold. By calling for the referendum, Papandreou brilliantly forced their hand. Not willing to risk a failure of the deal, and an expulsion from the Eurozone, the conservatives reversed course and publically supported the package. Papandreou then cancelled the phantom plebiscite.

But the affair should remind us all just how fragile the euro actually remains. In reality many stumbling blocks remain that could force Greece out. As the world's second currency, the euro's collapse would create a massive currency crisis in the European Union, the world's largest economy, possibly triggering a massive depression.

From its inception, the EU grew based largely on deceit, political bribery and corruption. Indeed, its accounts have remained unsigned by its auditors for the past fourteen years. Progressively, it has trampled democracy underfoot. The EU has an elected parliament but, as was the case in the former Soviet Russia, the elected body has no real power.

Whenever nations, such as France, Denmark and Ireland have voted in referendums against EU membership, their votes have been virtually ignored. Many of the main contributing nations, such as Germany and the UK, have been denied a referendum. In the case of Great Britain, the leaders of all three major political parties recently gave election promises of a referendum on continued EU membership. Last week, however, Prime Minister Cameron, who promised a "cast iron guarantee" of a referendum, led the three major party leaders in imposing a three-line whip to stifle a consultative backbench parliamentary vote for a referendum.

When the Greek referendum looked like a possibility, a thinly disguised panic erupted along the corridors of power in Europe. Reports came in that even Angela Merkel, the even tempered German Chancellor, had become highly agitated. If Greece were to vote to leave the euro and even the EU in order to renounce its economically suffocating euro debts, it is not unlikely that the other so-called PIIGS (Portugal, Italy, Ireland and Spain), would follow suit.

Like Greece, all the remaining PIIGS have been huge net beneficiaries of EU membership. Initially, trainloads of cash were given to them by the major contributing nations, in particular Germany and the UK. The PIIGS enjoyed a free market of some 500 million consumers and were able to borrow on financial terms offered only to triple 'A' issuers. In response to the mirage of burgeoning prosperity, financed by fiat money, they borrowed far beyond prudent levels. When the global recession struck, the over-borrowing exposed national insolvencies. The cure, insisted upon by the economic 'doctors' from the 'troika' of the EU, ECB and IMF, was even more debt and austerity. Democratic objection was brushed aside.

It was unlikely that the troika believed that the problem of excessive debt could be solved by more debt and that austerity would improve any debtor's ability to service debt. However, reality had never been a guiding principle within the EU. Far more important was the need to paper over problems and pretend that the grand vision was viable.

The unwinding of PIIGS debt is serious enough. But any breakout of democracy could be disastrous. If past bribes are forgotten and troika threats are seen as foreign interference, the PIIGS could vote to leave the EU en masse. According to the precedent set recently by Iceland, they could default entirely on their debts. Potentially, it would be catastrophic, not just for the EU, but also for the entire global financial system.

Financial planners and politicians could be faced with a possible depression accompanied by a breakdown of confidence in fiat currencies if either the euro or the EU collapses. With both the dollar and the number two global currency (the euro) facing an uncertain future, investors would likely be wise to maintain some exposure to stores of value, such as precious metals.

 


For an even more in depth look at the prospects of international currencies, download Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years.

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John Browne

Author: John Browne

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne

John Browne is the Senior Economic Consultant for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

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