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Zackariya: Will Greece's Financial Woes Be the End of Europe?

To put it simply, Greece's financial woes have been brewing for decades as the Greeks consistently voted in representatives across the political spectrum who promised the people more than the economy could deliver.

Greece
Louisa Gouliamaki | AFP | Getty Images
Greece

Successive governments have been unable or unwilling to initiate the structural reforms needed to foster more entrepreneurial activity and encourage the economic growth needed to fund Greece’s very generous state benefits.

With the European Union unable to impose more realistic fiscal discipline, stronger euro countries led by Germany are understandably unhappy to fund the bloated Greek national budget.

I remember visiting Athens after the 2004 Olympics and being shown the huge infrastructure improvements to the city and its beautiful homes in the elite seaside areas. Yet at the same time I was shocked at the level of personal tax evasion that seemed to be the norm rather than the exception costing the government $20 billion per year.

Another interesting under-reported fact is that Greece, according to Frontex, is the illegal immigration capital of Europe. It’s reported that about 80 percent of illegal immigrants to the EU enter via Greece's border — resulting in a significant drain on local resources.

It is injustices such as these, along with widespread inefficiencies, that lead many Greeks to view the state with deep distrust, a fundamental difference with how the citizenry view their governments in the North of Europe.

Yet at the same time the Germans may forget that it is the current weakness of the euro that has helped create such a large export boom in Germany. If the Deutsche Mark was in existence today, it would be a lot stronger than the euro, dampening Germany’s economy. Since Greece is not allowed to devalue its currency and help its own exports, some form of balancing payment from Germany and other stronger euro countries to Greece suddenly seems more reasonable.

Greece's deficit at around 180 percent of GDP is generally seen to be at an unmanageable level. Greece will likely need substantial sums to help enable an orderly euro exit or to cure its current economic malaise. Greece is unlikely ever to achieve the same levels of productivity as Germany and other stronger euro countries.

The question for Europe as a whole: Is Europe willing to pay Greece to transition orderly or will Europe risk further contagion to Spain, Portugal or even Italy? If the EU were a single country, it would be the largest economy in the world and its combined debt would amount to less than that of the US (as a percentage of GDP), so it is affordable and potentially sustainable.

Greece is roughly the size of Alabama and yet it is having a far greater impact on the future of Europe than its size would suggest. The Greek case has finally proved the much-argued debate that a fiscal union without a political one is ultimately unworkable. The Greek crisis is pushing the EU to rewrite its rules and call for far further integration and removal of national powers to Brussels. This may push important EU countries such as the U.K. to reconsider its membership.

What does all this mean for businesses trading with Greece and the wider Euro area? I have worked in the global financial markets for almost 25 years specializing in physical foreign exchange. We are advising our corporate clients that if you can denominate your contracts in your home currency (e.g. U.S. dollar), you will potentially avoid many of the issues that a Greek exit from the euro could bring.

There are concerns that a disorderly Greek exit and further contagion could lead to widespread collapse of businesses in the region. Hence, I recommend getting credit risk insurance on individual business partners if you can.

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Sacha Zackariya is CEO of The ChangeGroup International plc which handles the international corporate payments and travel money needs of over 2 million customers annually around the world. He holds an MBA from Wharton-INSEA.

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