How the EU Has Secured the Greek Default it Sought to Avoid

“Germany Backs Rescue Fund,” the front page of today’s Financial Times declares. “Victory for Merkel on Euro Zone Aid,” adds the front page of today’s International Herald Tribune.

Good times, apparently, are here again…if the stories that followed these headlines are to be believed.

“The German parliament voted by an overwhelming majority in favor of measures to bolster the $597 billion eurozone rescue fund,” The Financial Times’ story began, “giving [the fund] new powers to buy bonds and recapitalize weak banks, in a move that lifted financial markets and boosted the euro.”

The Dow Jones Industrial Average celebrated the German vote with a 145-point rally. Today, the Dow is “uncelebrating” yesterday’s vote by falling — at this moment — exactly 145 points.

We’ve seen this movie once, if not a dozen times before. The plot goes something like this:

  • Investors worry about Greece going bankrupt.
  • Investors subsequently worry that a Greece bankruptcy would trigger a contagion that would doom other European nations, as well as several large European banks.
  • Markets fall worldwide.
  • Some hodgepodge of EU officials announces, approves or revises a bailout plan.
  • Markets rally worldwide.
  • Within a day or two, investors re-think their initial exuberance. Their optimism yields to doubt.
  • Markets resume falling worldwide.

The German Bundestag’s approval of an enlarged bailout fund — as well as the preceding and ensuing stock market volatility — follow the script above, scene-for-scene, line-for-line.

But the real story for investors is no the movie we’ve already watched a dozen times, it is the live drama that’s now unfolding. The movie is merely a distraction from the drama — creating lots of volatility, but very little substance.

The unfolding drama is “Oedipus Rex,” with a financial twist.

Oedipus, as you may recall, was that unfortunate lad who, according to the Oracle at Delphi, would marry his mother and kill his father. Oedipus fled his homeland immediately. But in trying to escape his fate, he sealed it.

Angela Merkel, you are Oedipus…sort of.

If the Oracle at Delphi were still in the predictions business, she might prophesy that Greece will default and the euro will fail. And if so, Greece and the EU would immediately attempt to flee their fate. But like Oedipus, in fleeing their fate, they would seal it.

Greece might, for example, beg its rich neighbors in the north for a “short-term” loan. It might also enact austerity measures in exchange for even larger handouts.

The EU, in an effort to avoid its fate, might agree to ship billions of euros down to Greece to try to contain the threat of contagion. Further, the EU might agree to continue sending billions until there was no more money to send…or until Greece defaulted anyway.

The bailout funds — no matter how large they grow — will merely slow the march toward inevitability. The destination is certain; the timetable is variable.

Here in Europe, your editor has been conducting a week-long “Farewell Euro Tour.” From Amsterdam to Geneva to Venice and back to Amsterdam, your editor has been asking men and women on the streets what they think about the euro and about its chances for survival.

Generally speaking, support for “saving Greece” is tepid at best. While most folks voiced some version of, “Well, we should try to do something to save,” they also voiced some version of, “We liked our old currency better.”

We’ll detail our encounters next week, while also providing a few of the highlights we captured on video. For now, let it suffice to say that popular support for rescuing Greece appears to be waning, no matter how the Bundestag votes.

Eric Fry
for The Daily Reckoning