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The Coming Financial Collapse in Europe?

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The only thing that could alter this outcome of systemic collapse and ever worsening riots would be if Greece staged a pre-emptive, full-scale Icelandic type of default, now.   While Europe's political leaders and bankers view a total default now as the worst possible nightmare (and it would be for Greek pensions, retirees, and many EU banks), the irony is that it is only a total default, now, that could possibly solve Greece's debt problems and thereby allow it to quickly return to growth.

 

Understand, however, that such defaults are akin to forest fires:   they wipe out all the dead wood, and that is what sets the stage for a new period of growth.   As mentioned, we've just witnessed this phenomenon in Iceland, which did the following between 2008 and 2011:

*  Had its banks default on $85 billion in debt, an amount that is more than 6 times the size of the country's annual GDP ($13 billion).   (The debt of most advanced countries is nowhere near that multiple of its GDP.)

*  Jailed the bankers responsible for committing fraud during the bubble.

*  Gave Icelandic citizens debt forgiveness equal to 13% of GDP!  

  

 

And today, just a few years later, Iceland is posting GDP growth of 2.4%, which is more than that of both the EU and the developed world in general!   In short, the short-term pain combined with moves that reestablished trust in the financial system (i.e. holding those who broke the law accountable) created a solid foundation for Iceland's recovery.

 

Now, compare this to Greece which has "kicked the can down the road" (i.e. put off a default) for two years now, thereby allowing its economy to be dragged into one of the worst depressions of the last 20 years, while continuing to increase its debt load.   This latest bailout added 130 billion euros in debt (much of which will eventually have to be paid back), in return for a measely100 billion euros in debt forgiveness).  

 

Iceland, by contrast, staged a total default, and returned to growth within 2-3 years.   Greece and the Eurozone in general have done everything they can to put off a REAL default, and have done so with miserable results.   Let the economic numbers tell the story:

 

Between 2011 and 2012, after their default, Iceland's GDP climbed into the range of 2.4 - 2.9%.   Meanwhile the median GDP growth for the 17 EU countries using the euro went from 1.4% to minus 0.3%!   -- while the total 27 EU countries (euro and non-euro) went from a median 1.5% to zero percent.

 

The main point here needs to be "driven home":   It is that defaults can in fact be quite positive in the sense that they deleverage the system (rid the country of all its debt burden) and thereby set a sound foundation . . for growth.   Yes, the short-term pain is acute -- Iceland saw its economy collapse 6.7% in 2009 when it defaulted.   However, a combination of defaulting and debt forgiveness (for households) can restructure an economy enough for it to begin growing again, and rapidly.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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