The Greek Drama

It wasn’t difficult to imagine that the Greeks would have voted with anger in their hearts. A fiscal readjustment without currency devaluation is not a pleasant experience. When people’s pensions are cut by 15-20% in nominal terms, the cohesiveness of society is at risk. The inconclusive results of that election and the standoff between a Balkanic and a European Greece are going to keep markets unsettled for another couple of months at least.

The election of the new French president that ran on the platform of ‘we can’t live on rigour alone’ is another, more core-European reaction to the same malaise. Given that Europe without France is an oxymoron, the challenge is now on Mrs Merkel to find the way to square the circle. Absent the ghosts of Weimar, a little inflation would be good for Europe, as a collective mechanism for adjusting their economies in a less painful fashion.

It is too early to tell if Mr.Hollande will be able to use his new mandate to help achieve what Mr.Monti has been arguing for some time, namely that the economies that had spent beyond their means in the good years needed to put their fiscal houses in order, but that this cannot be the only solution at a time where we are still mired in the ‘great recession’ which was initially precipitated by the 2008 banking crisis. Monti is having his own problems in Italy, where the level of taxation is near or beyond the point of diminishing returns. The next three months will be telling for the future of Europe beyond the question of whether Greece is in or out.