Brexit, The Eurozone, And Oh Yes, Greece

by on 30 January 2019


There is a lot of economic uncertainty in Europe.

There are questions about the resolution of Brexit. And it does not appear that Greece is “out of the woods.”

These matters are discussed with investment options presented.


The world is a dangerous place with some countries having strong economies and others faring poorly. In what follows, the focus is on Europe and in particular Greece, and the UK.

The Big Picture

Parts of the world are growing rapidly. But this is not the case for the UK or the Eurozone. As Table 1 indicates, some Eastern European countries are growing at a reasonable rate. But in Western Europe, with the exception of Ireland, the “mature” countries are growing at a snail’s pace. In comparison, the US appears quite healthy. And how about China and India? We hear of a slowdown in China but when you are still projected to grow at more than 6%…

Table 1. – Projected Growth and GDPs of the Eurozone and Other Countries

Source: FocusEconomics

Many people do not understand why being in the Eurozone puts countries at a disadvantage.

The Eurozone Problem – A Primer

Consider the following simplified example. If Germany can produce a product more cheaply than Greece, then everyone, including the Greeks, will use Euros to buy the product from Germany. However, if Greece and Germany have their own currencies, the Greek currency would weaken relative to Germany making German products more expensive to buy with the Greek currency. By the same token, the product would become cheaper to those using the German currency. These adjustments would keep trade in balance.

However, if Greece and Germany use the same currency as they do in the Eurozone, this “adjustment vehicle” will not work. The result for Greece is that it buys all its goods from Germany, its unemployment rises, and it literally runs out of Euros.

To rectify this situation, Greece would have to implement economic reforms that reduce its costs until they were competitive with Germany’s costs. But don’t hold your breath on this; it won’t happen.

Eurozone Countries At Risk

So what Eurozone countries might run out of Euros and encounter the same problems that Greece did in 2009? Table 2 provides trade data on the Eurozone and other countries. Of course, a negative trade balance can be offset by capital inflows. But Greece has limited capital inflows and France, Belgium, Spain and Portugal bear watching. Needless to say, the US has to have huge capital inflows to counter its trade deficits. The dollar would not hold its value without compensating inflows.

Table 2. – Trade Data, Selected Countries

Source: WorldBank

In fact, the dollar weakened relative to the yen from ¥360/$ in 1971 to ¥120/$ in 2015. That meant a dollar would only buy a third as much from Japan as it did in 1971. Conversely, yen holders could buy dollar products for only one third as much as they did in 1971. In short, this adjustment allowed the US to remain competitive with Japan.

So What Are the Prospects For Greece?

While the International Monetary Fund does not currently have an ongoing support program for Greece, it did in the past and continues to monitor the situation. Here are the findings from its recent monitoring mission. The bold highlights are mine.

Growth and job creation in Greece are expected to accelerate further in 2019, while public sector financing needs remain manageable. To maintain growth momentum, reform efforts should focus on raising productivity and reducing vulnerabilities. Policy priorities include creating fiscal space to lower direct taxes and raise public investment and targeted social spending, accelerating the clean-up of bank balance sheets, and enhancing labor market flexibility and cost competitiveness. This would also help to mitigate intensifying downside risks.
Crisis legacies remain significant, including high public debt, impaired private balance sheets, and a weak payment culture. In this context, external risks (such as deterioration in trading partner growth, a potential sharp tightening of global financial conditions, and a slowdown in global trade) could dampen exports and growth. Investment and medium-term growth and competitiveness prospects could be weakened by reform fatigue (or reversals) in the context of an election year. Fiscal risks stem from ongoing court cases, while the banks remain sensitive to financing conditions and regulatory changes.

Okay, let’s cut through the IMF terminology. What is really happening?

Back in 2009, Greece effectively ran out of Euros. It was saved by major infusions of financial resources from the IMF and its Eurozone partners. In return, Greece was forced to reduce its government deficit from 15% of GDP in 2009 to less than 1% in 2019. The result was in part an unemployment rate that got to more than 27% in 2012. Since 2012, restrictions in Greece have been relaxed and the unemployment rate has fallen to 18%, a level that is still much higher than any other Eurozone country.

So is Greece “out of the woods”? The IMF does not think so. It argues that its debt – at 177% of its GDP – is unsustainable. The European nations claim they have helped with the debt problem by:

  • Advancing the maturity of all debts for a decade and
  • delaying interest payments on the debt for the same period, provided Greece continues with its austerity program that will require a budget surplus. 3.5% until 2022.

The reality is that nothing has really changed for Greece. Its debt remains (with its real costs to Greece delayed a decade) because European banks do not want defaults on their balance sheets.

I quote Christine Lagarde, the Managing Director of the IMF:

“There is no doubt in our mind that Greece will be in a position to re-access financial markets, and certainly for the medium-term we are very comfortable….As far as the long term is concerned, we have reservations.”

So what is likely to happen in Greece? History will be repeated: Opposition to the austerity measures will grow, the Greek government will relax them, consternation among Eurozone leaders will once again grow, and in ten years, its high debts will remain.

Brexit Prospects

There are many uncertainties over how Brexit will be resolved. Nevertheless, there is reason to believe things will work out reasonably well. Why? We certainly hear a lot about political dysfunction. But the business interests in the UK and mainland Europe have too much at stake to allow too much disruption.

Investing In The Eurozone Or The UK?

Table 3 provides data on selected Eurozone and UK Exchange Traded Funds. They all reflect the same pattern: last year was not good and that contributed to low three-year returns.

Table 3. – Selected European Investment Vehicles

Source: Yahoo Finance


The world has a large number of “moving parts.” They include:

  • Trump – what will he do next,
  • the impact of the Mueller report,
  • the US/China trade war,
  • Brexit, and
  • continuing Eurozone problems, including Greek debt.

In these circumstances, I am not focusing on capital gains income. Instead, I am looking for equities/ETFs, and mutual funds with high dividend rates and low payout ratios.

Elliott R. Morss –