QUESTION: Hello, I do not understand what Martin say about the fact that the Greek debt doubled when it changed into euro. Indeed, if the currency is twice the value of the old one then all your debt will double as Martin said. However all your assets will double in value too. So it is the same situation as before. I may miss something, could you please explain me what I am missing ?
ANSWER: Yes, private assets rose in value in Southern Europe as the euro rose from 80 cents to $1.60. However, this tended to produce deflation, not inflation as prices rose eliminating competition for tourism etc. reducing sales. The point about the public debt doubling was the fact that this was previous debt, not current, and government has no real performing assets. To service the debt that doubled, they also then began to raise taxes more aggressively and this then was much like strip-mining the economy. Servicing the previous debt increased dramatically reducing the ability to continue spending on various sectors as previous debt servicing was increased.
Germany benefited from the Euro because they were manufacturing products and selling them into Europe and did not have to worry about currency fluctuations. I helped the Japanese to sell their products globally by showing them that they had to price their products in the local currency and then take the FX risk home to manage. They beat the Germans who were pricing their cars always in Deutsche-marks so a Porsche doubled in value in dollar terms between 1970 and 1980 just due to currency – not inflation. The movement of creating a euro was to eliminate currency risk so the German manufacturers could sell their products throughout Europe.
Greece’s top three main industries are tourism, shipping, and industrial products. By joining the Euro, Greece lost the attraction of a cheap holiday for tourists and shipping prices rose. Greece is nowhere near attaining those manufacturing characteristics, and is often one of the smallest in this regard compared to Germany, Japan, and China. However, the Greek-owned fleet of ships remains where it has been for a very long time, at the TOP of the global ranking of shipowning nations. Joining the Eurozone has hurt Greek shipping increasing its cost and opening the door to competition. China is moving upwards rapidly in shipping, and potentially could overtake both Greece and Japan (the second largest) to become number one shipowner within a decade. Greece has not benefited from joining the Eurozone and this has been the greatest myth which has hurt the Greek people tremendously.
European tourism began to move outside the Eurozone for vacations because it was cheaper. Greece has an economy with a public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading Eurozone economies, this has contributed greatly to its debt crisis. Tourism provides 18% of GDP, so joining the Euro was a complete disaster for tourism and when the government is 40% of GDP and produces nothing to export, the debt crisis simply escalates. The likelihood of Greece have to exit the Eurozone is growing tremendously by the day.