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When the news broke earlier this week that Greek
prime minister George Papandreou would seek a popular referendum on the
bailout deal that had been so torturously negotiated over the previous
months, financial panic quickly emerged. A "no" vote by the Greek
people would likely lead to a partial dissolution of the Eurozone and could
be the beginning of the end of the euro currency itself.
As it turns out, Mr. Papandreou's seemingly
democratic gesture was more likely a political tactic to lure the opposition
conservatives into sharing the political burden of passing the bailout deal.
Although many of these conservatives had likely supported the bailout
package, they kept their distance due to its extreme unpopularity on the
street. They had seemed perfectly content to let all the political heat fall
on Papandreou, who no doubt would have fallen when the deal took hold. By
calling for the referendum, Papandreou brilliantly forced their hand. Not
willing to risk a failure of the deal, and an expulsion from the Eurozone,
the conservatives reversed course and publically supported the package.
Papandreou then cancelled the phantom plebiscite.
But the affair should remind us all just how fragile
the euro actually remains. In reality many stumbling blocks remain that could
force Greece out. As the world's second currency, the euro's collapse would
create a massive currency crisis in the European Union, the world's largest
economy, possibly triggering a massive depression.
From its inception, the EU grew based largely on
deceit, political bribery and corruption. Indeed, its accounts have remained
unsigned by its auditors for the past fourteen years. Progressively, it has
trampled democracy underfoot. The EU has an elected parliament but, as was
the case in the former Soviet Russia, the elected body has no real power.
Whenever nations, such as France, Denmark and
Ireland have voted in referendums against EU membership, their votes
have been virtually ignored. Many of the main contributing nations, such
as Germany and the UK, have been denied a referendum. In the case of Great
Britain, the leaders of all three major political parties recently gave
election promises of a referendum on continued EU membership. Last week,
however, Prime Minister Cameron, who promised a "cast iron
guarantee" of a referendum, led the three major party leaders in
imposing a three-line whip to stifle a consultative backbench parliamentary
vote for a referendum.
When the Greek referendum looked like a possibility,
a thinly disguised panic erupted along the corridors of power in Europe.
Reports came in that even Angela Merkel, the even tempered German Chancellor,
had become highly agitated. If Greece were to vote to leave the euro and even
the EU in order to renounce its economically suffocating euro debts, it is
not unlikely that the other so-called PIIGS (Portugal, Italy, Ireland and
Spain), would follow suit.
Like Greece, all the remaining PIIGS have been huge
net beneficiaries of EU membership. Initially, trainloads of cash were given
to them by the major contributing nations, in particular Germany and the UK.
The PIIGS enjoyed a free market of some 500 million consumers and were able
to borrow on financial terms offered only to triple 'A'
issuers. In response to the mirage of burgeoning prosperity, financed by fiat
money, they borrowed far beyond prudent levels. When the global recession
struck, the over-borrowing exposed national insolvencies. The cure, insisted
upon by the economic 'doctors' from the 'troika' of the EU, ECB and IMF, was
even more debt and austerity. Democratic objection was brushed aside.
It was unlikely that the troika believed that the
problem of excessive debt could be solved by more debt and that austerity
would improve any debtor's ability to service debt. However, reality had
never been a guiding principle within the EU. Far more important was the need
to paper over problems and pretend that the grand vision was viable.
The unwinding of PIIGS debt is serious enough. But
any breakout of democracy could be disastrous. If past bribes are forgotten
and troika threats are seen as foreign interference, the PIIGS could vote to
leave the EU en masse. According to the precedent set recently by Iceland,
they could default entirely on their debts. Potentially, it would be
catastrophic, not just for the EU, but also for the entire global financial
system.
Financial planners and
politicians could be faced with a possible depression accompanied by a
breakdown of confidence in fiat currencies if either the euro or the EU
collapses. With both the dollar and the number two global currency (the euro)
facing an uncertain future, investors would likely be wise to maintain some
exposure to stores of value, such as precious metals.
John
Browne
Euro Pacific Capital, Inc.
John Browne is a former member of the UK
Parliament and a current senior market strategist for Euro Pacific Capital. Click here to learn more about Euro
Pacific's gold & silver investment options. For a great primer on
economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes
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