More on Greece and Nationalism

The deal in Greece won’t work. Greece cannot pay. I agree with John Carney; eventually they will leave the eurozone. But not before considerable damage is done and nationalism makes its presence known throughout Europe.

My thesis:

  • Deficit spending on [a large] scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year)…
  • Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
  • As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  • Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.

Last April I said that unless we see a multi-year recovery economy in which the nagging debt and default issues are entirely removed, economic nationalism will return with a vengeance. And that means political conflict in which the potential for armed responses is high. This is still the case now.

Do see the source images below. The caption for this one reads:

Another cartoon by Stathis Stavropulos. The EU’s bean counters have discovered there are 33 beans in the soup, when there should only be 28. The five extra are to be handed over to the Germans.

Source: Photo Gallery: Anti-German Sentiment on the Rise in Greece – Der Spiegel

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.