Europe Economy

Would Rescuing Greece Make Matters Worse?


Attempts to rescue Greece are simply making matters worse and the quicker the crisis comes, the better for the world.

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This is what John Taylor, the founder of FX Concepts, one of the largest currency hedge funds in the world, wrote in a recent article.

"If the political actors in this tragedy-comedy play their roles well – staving off collapse – our suffering will be worse," Taylor wrote.

He is shorting the euro and sees the single currency hitting $1.20; he also believes longer term the euro will collapse - and the sooner the better.

"The quicker the crisis comes, the better for the world, but almost everyone is working in the other direction, stretching it out to inflict maximum pain," Taylor wrote.

"At this point, the best way out for Greece is very clear. Greece should pull out of the euro this weekend, issue new drachma notes as soon as possible, and let the lawyers clean up the mess. If I were running Portugal, Italy, or Spain I would do the same thing – the first one out is the winner."

Now there may be many people out there who agree with Taylor but he has no support from the policy makers or the politicians.

Jean-Claude Trichet, who on Thursday helped push Greek 10 year yields back below 8 percent by saying a default on its debt was not an issue for Athens and talking up a joint EU/IMF aid plan, also said getting out of the euro is not as simple as getting on and off a bus.

Exit Impossible

The barriers to exit are huge, with the original rules of the stability and growth pact giving no mechanism for a country to leave the currency union once it is in.

Any change to the rules would ultimately need a change in the constitution of the euro zone's biggest economy, Germany, because the European Union's stability and growth pact is built in it.

Hans Redeker from BNP Paribas says that given that this would take a two thirds majority and there is little if no support within Germany for a bailout of Greece or any other euro zone member, it would be a very difficult move – tantamount to political suicide for Angela Merkel and her coalition government.

But with Germany so competitive and seeing productivity rising year on year versus other euro zone members, there is little room for maneuver.

Without the ability to devalue their way out of the trouble, the Greeks would need to drastically reduce their own living standards via lower wages to keep up with the Germans.

"Internal devaluation is hell," says Taylor. "We believe the Baltic States will make it because they would eat grass and leaves to stay out of the hands of the Russian bear next door, and if Europe follows its Greek strategy much longer, they might have to."

Euro Needs to Move Lower

Redeker says the threat of internal devaluation is the reason the euro needs to move lower. His reasoning is that a lower euro makes German goods more competitive outside of the euro zone and takes the pressure off countries like Greece and Spain, by diverting German exports away from their markets.

Taylor dismisses this thinking as wishful and instead believes that ultimately the euro zone experiment needs to come to an end.

"Money is money and its powerful logic will win in the end," he wrote.

"No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3 percent (weight in euro zone GDP) implies."

Redeker may not be as bearish as Taylor, but is by no means a bull on the euro zone and is advising to stay clear of the currency union.

He told Squawk Box Europe that you should look to countries like Hungary that have already taken on the pain of restructuring and are making the changes that Greece and others in the euro zone have yet to face up to.

Taylor's plea "to let the Greeks out and please restructure the euro, or drop the whole idea" is likely to fall on deaf ears.