Like every good Greek tragedy, there is a sense of foreboding about what is likely to occur now the next act of the Greek financial/political drama has commenced. The parlous state of the Greek economy has already led to two dramatic downturns in global financial and property markets.
The question now is whether it will happen for a third time, and will the consequences this time move the Western world back into another global financial crisis. The curtain went down on the last act with an inconclusive election and none of the political parties willing to take the potentially poisoned chalice of government. The ongoing dithering as to whether Greece should, or should not, leave the European Union has heightened the uncertainty.
With the newly formed government announcing its intention to renegotiate the terms of the bailout agreement, it is timely to put this drama into perspective. The Greek economy is the 42nd largest economy in the world, ranking after Vietnam and Chile. It accounts for 0.4% of the world’s economic activity, and surprisingly only accounts for 1.9% of the European Union’s economic activity. The Greek economy has not grown for some years, and recently it has contracted. By comparison, China, the world’s second largest economy, is now growing at a more subdued 8.5%. Even at this subdued rate, China is effectively adding over three Greek economies every year. The additional economic activity in China is self-supporting and unsubsidised; the economic activity in Greece is struggling to be sustainable and requires massive amounts of debt to support it. If the concern is about reduced levels of global economic activity, the ructions in Greece really don’t matter! They just don’t register on a world scale and are more than compensated for by growth in large economies like China and India and high levels of growth in many mid-sized developing economies.
The problems in Greece stem from the unrealistic idea that the Greek currency should be tied to the fortunes of the stronger currencies in Europe, particularly Germany. Weaker, less productive economies need the flexibility to lower their exchange rates when they are finding it difficult to compete. Their industries can then remain competitive, and demand for imports is reduced. A country can find the exchange rate at which it can sustain itself and live within its own means. This option was taken away from Greece when it joined the European Union and now, they undoubtedly need to move back to the independence of their own currency. While it will cause short-term problems of adjustment in Greece, and a downward adjustment in the standard of living, the re-creation of the drachma is unlikely to have much impact on global financial markets. The value of the new currency could be 30% lower than at present, and at this level it offers a permanent structural solution to the underlying problem, instead of increasing dependence on more and more debt.
This Greek tragedy could easily have a happy ending, with Greece finding independence in its own currency. It could, in true Greek tradition, blaze the trail for the other struggling economies of Europe. The successful resolution of the issues in Europe could be the last hurdle before the global economy finally moves towards a fully-fledged recovery.
What does this mean for Australia, and in particular, the Byron Bay property market? The next few months could be characterized by volatility and uncertainty as the politicians, bankers and bureaucrats re-explore what, by now, must be very familiar ground. The ability of governments to enforce austerity measures, for the promise of more debt, is both bad politics and bad economics.
Hopefully the inevitable outcome of Greece, and some other countries, moving to their own currencies will occur within three to six months. In the meantime, the Australian two-speed economy is likely to continue to grow at levels above 2%. Local confidence levels will go up and down, but the difference this time, is that an increasing number of commentators are seeing a real solution in Greece is possible. Providing there is progress in this direction over the next eight weeks, this drama could very quickly fall out of the headlines.
With other positive news emerging in the US, the Australian spring may also see the new shoots of a more sustainable global recovery. In the meantime, the level of activity in the Byron Bay market continues to be good for well-priced properties.
The feature photo was taken by Louise Telfer (M: 04 2385 3597).