The Next Global Problem: Portugal

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By Peter Boone and Simon Johnson

Comment by Didier Sornette, 16 April 2010

The Germans cannot yet make the decision not to bail out Greece. Europe and the ECB are going to provide the short-term relief to Greece, somewhat similarly to the way Bear Stearns and AIG were bailed out for a while. Like the Fed before Lehman brothers collapsed, the rest of Europe needs a worsening of the crisis to be able to politically be able to pull the plug. The situation will worsen in a series of abrupt announcements of budget deficits and required funding from Greece (again next year), soon Portugal, then Spain and probably others (PIIGS and STUPID).

At some point, the amount of credit creation by the kind of Ponzi scheme that the ECB and European agreements allow will be so large as to frighten the stronger European countries, in particular the Germans, and they will stop supporting it.
Recall that this super Ponzi scheme consists of using the government bonds as deposits to the ECB to borrow more money by banks which then buy the government bonds of countries whose debts balloon without control. This is very vulnerable to a downgrading of the government bonds, in a way completely similar to the destabilizing effect of the collapse of the value of the equity and other collateral that banks held and that led to the downward spiral during the 2008 financial crisis.  

I thus envision that the Euro is going to explode and countries are going to default with also severe devaluation of several ``new-old'' currencies. This will happen in the next 2-3 years, notwithstanding some other extraordinary development, such as a major volcano erupting in Santorini (Greece), in the Azores (Portugal), in Vesuvius (Italy), or Tenerife (Spain)... or other calamities that unite Europe. It is an historical fact that humans need common enemies and major catastrophes to unite and only then.

At the core of the Greek problem (and others) is the differential in the productivity and quantity / quality of labor produced by workers in different countries. Countries which live at a different pace and work less efficiently cannot hope for the same living standard as people in harder working countries. The unique Euro currency and the unique monetary policy combined with the policy of providing huge transfers of funds from the richer European countries to the less ``favored'' countries in the last decade has led to the illusion that Europe is going to stabilize in a nice equilibrium.  This forgets the heterogeneity of people, of their culture, of their approach to collective goods. There are large differences in the way French, German, Greek and Swiss people cooperate.

Greece and the Eurozone—Now Gambling with Europe’s Future

by Jacob Funk Kirkegaard, April 19th, 2010

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