Possible Endings for the Greek Drama

I did not set out to write a trilogy about Europe, but the market is telling us that nothing else matters right now.

My long-standing position is that Europe is engaged in a normal democratic political process with a very large number of contending parties.  In such matters it is difficult to predict the exact outcome beyond saying that no one will be completely happy.

My approach is pretty modest in terms of forecasts.  I do not know what the exact outcome will be.  My current guess includes the following:

  1. The eventual outcome will include a bit less austerity because of recent election results;
  2. European leaders will manage to avoid the very worst outcomes; and
  3. The nature of the political process leads to eleventh-hour solutions, permitting everyone to fear the worst as long as possible.

Nearly everyone else, regardless of credentials, claims a better crystal ball than mine.  There is actually a wide range of possible outcomes worthy of review.

Possible Endgame for Europe

Let me rank these from worst to best.

  • Doomsday!  This is the story getting the buzz.  There will be a bank run in Greece based upon fear of leaving the EuroZone.  This will rapidly spread to other countries.  Advocates of this concept point to the sequential attack on banks in 2008 to prove their point.

Nearly every media source has now highlighted this graphic possibility, so it is already familiar to everyone.  CNBC now promises to show lines at Greek ATM machines, in the same way they helpfully showed us oil spilling into the Gulf during the time of the BP oil spill.

  • The slow-moving train wreck.  This is the analysis from Nouriel Roubini. 

"…there are only four ways to achieve such real depreciation:

  1. First, a sharp weakening of the euro. But this is unlikely as Germany is strong, the U.S. economy is weak and running twin deficits and the ECB is not aggressively easing monetary policy;
  2. Second, a rapid reduction in unit labor costs through structural reforms that increase productivity growth in excess of wages. But this is just as unlikely: It took 10 years for Germany to restore its competitiveness this way; and Greece cannot stay in a depression for a decade, until reforms start to have a real impact;
  3. Third, a rapid deflation in prices and wages, known as an “internal devaluation.” But this would lead to five years of ever-deepening depression, while making public debts more unsustainable as the fall in prices would increase the real value of such debts (the balance-sheet effect of debt deflation);
  4. Fourth, if the first three options are impossible, the only path left for Greece is an EZ exit: A return to a national currency and a sharp depreciation would quickly restore competitiveness, improve the trade balance and rejuvenate economic growth.

The full analysis from Dr. Roubini is available at his website ( subscription required, and where I am a long-time contributor).

The Roubini analysis is very pessimistic for the EuroZone.  My only objection is that it is a pure economic approach with little allowance for changes by the leadership.  Meanwhile, I find it interesting that Dr. Roubini sees the process as playing out over time.  My guess is that most would be astounded to discover that he is personally 70% invested in stocks with a 50-50 split between global and the US.  You can see a full CNBC interview here.

  • The PBS Newshour balanced viewpoint.  I understand that some may disagree about balance, but PBS does try to get a strong representative for differing viewpoints.   They had a great segment featuring an Athens source I have featured, a prof from the Kennedy School at Harvard, and Fred Bergsten from the Peterson Institute.  Here is Bergsten's comment:

"My bet is that they would get back with the program. And despite the abhorrence of the program by the Greek electorate, understandably, their desire to avoid being kicked out of the euro would be even greater. So, it's going to be messy, but I think the outcome, whether driven by bank runs or by a new election, is going to be to force them back into the fold, at least to an important degree, enough that the Europeans can keep lending them money.


Everybody saves face. A growth element will be added to the package. There will be a little modification in the austerity requirements. But it will be basically back to the program as has existed for the last couple years."

Here is the entire video from PBS.  I urge readers to watch it — a nice change of pace from their regular diet of financial news.


  • The Marshall Plan for Europe.  London-based journalist Matthew Lynn offers  an intriguing alternative.  Germany, recognizing self-interest, decides that the EuroZone breakup is not such a good idea.

Investment Conclusion

Getting great investment returns means going against the flow.  If you just followed the market, you would be average.  If you try to guess the market, you are usually blundering at the major turning points.

Most investors are looking only at the worst case of the possibilities listed above.  Meanwhile, those who focus on fundamentals will be right on Europe, right on the economy, right on earnings, and (eventually) right on stock prices.

Prior pieces in the trilogy include the following:

Why not to Panic about Europe

The Investor Edge from Europe


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  • Scott May 17, 2012  

    Excellent and level analysis of the European situation. As always Jeff you have a clear view on the world.
    One question – how about a TARP plan for Greece and Spain?

  • Octavio Richetta May 17, 2012  

    Here is your “Chicken Little” again, a former prof. like yourself. IMHO, where your analysis goes wrong is in believing current equity prices reflect the worst case/Doomsday scenario. I agree with your view on the end point for Europe but also believe lower equity prices go along with that view.

  • oldprof May 17, 2012  

    Scott — The possible alternatives are expanding rapidly, although you do not seem them in the mainstream media.
    You have the right idea with TARP, but it may involve direct lending from the ESM. This might include lending to banks or bank authority for the ESM.
    I also think that some kind of deposit insurance might be announced.
    This would stop the bank run story, leaving us only to worry about slower growth.
    Thanks for joining in, and the kind words.

  • oldprof May 17, 2012  

    Octavio! I am delighted to see that you are still reading. Anyone with an MIT PhD will eventually see the error in casting me as a polar opposite of that other guy!
    One difference is that his viewpoint never changes, regardless of the evidence. Mine does, as you will see.
    BTW, I don’t think that current prices reflect doomsday and I never said that.
    Current prices reflect an excessively high probability of a 2008-style systemic collapse due to Europe. When it is obvious that this is off the table, we’ll have a snap-back, short-covering rally.
    It will not take us back to the starting point, but it will be meaningful and create a fresh start.
    Keep reading.

  • Bo May 18, 2012  

    Your analysis is sensible and reasonable. I suspect things may ultimately turn out just you expected. But consider this: people won’t compromise willingly. They will be forced or scared into compromise just like what happened in US 2008. From this perspect, the stock market could get a lot worse before getting better. I think if we are to panic, better panic now.

  • Denbo May 18, 2012  

    Not sure why people said this is a reasonable analysis. This post analyses nothing. It simply poses some possible outcomes but says little about their probabilities and even less about the causes behind them.
    Even the author admits he is just guessing.
    This issue exists because the Greeks voted for Syriza. Since they did, Tsipras has claimed they will throw out austerity altogether and the Troika will still keep on paying.
    So will the troika pay up? No… or if they do they are foolish. I think the IMF will balk at the ECB and EU won’t foot the bill without the IMF.

  • cheap jerseys May 19, 2012  

    IMHO, where your analysis goes wrong is in believing current equity prices reflect the worst case/Doomsday scenario. I agree with your view on the end point for Europe but also believe lower equity prices go along with that view

  • Angel Martin May 19, 2012  

    Jeff, this article by Ray Dalio is where my thinking is on the outcome for Greece and the rest of the periphery countries.
    Right now, the Troika is forcing Greece into what Dalio calls an “ugly deflationary deleveraging”. At some point, unless there is a dramatic change at the ECB, Greece is going to crash out of the euro and likely into a depreciating drachma and an “ugly inflationary deleveraging”.
    The only way Greece and the rest of the periphery stay in the eurozone is if there is enough eurozone inflation to get their nominal gdp growth above their interest costs.
    It may happen but i doubt it.
    I think that because of weak leadership in europe they are going to delay and delay and delay on printing to balance the deflationary forces until it is too late. My guess is when, in desperation, they finally do it, the euro will be in such crisis and have so little credibility that their attempts to reflate turn into a currency collapse and they will go straight to “ugly inflationary deleveraging”.