Okay so we don’t know anything about politics or economics but let’s look at Euro-land like a stock.
There are a bunch of different businesses, from the long-established Germany and France (cash cows) and the up-and-coming countries like the Czech Republic (stars.)
But then you have Greece. In the strategic analysis it is a dog. It’s not providing growth or positive cash flow. They have had many warnings and restructuring programs but there is still no end in sight.
Greece seems to have compounded their problems with fraud and trying to conceal the depths of their issues from Euro HQ and the other divisions.
What’s the right thing to do?
In this case you jettison the division and let it find it’s own way.
How does Europe lose by making an example of Greece? Some say that yields on Euro bonds would have to go up. I say not so. Germany and France will still be Germany and France. If anything they will improve because investors will know that they will not have to pay for chronic problems like Greece.
After all, yields on state and local debt in the US vary from place to place and all differ by instrument type and have a spread over treasuries. Why shouldn’t European country debt have the same dynamic? Just because it’s the same currency doesn’t mean we can’t analyze and price country risk separately.
What will happen to Greece? Nothing. They can go back to their own currency and try to restore confidence in their system, country and economy. Some Greek companies and people might lose some mobility or business preferences but they certainly won’t be fatal. This is Greece after all. The international companies there built themselves up before and during the Euro area. They will continue to do so after.
The Euro makes a statement that they know how to deal with change in both directions. So far it’s been absorb, grow, and expand. Every business has to prove it knows how to deal with problem divisions, markets and management teams.
By the way — by all appearances there are many investors salivating at the chance to buy Greek assets on the cheap. Getting dropped from the EU might be the best thing that ever happened to the country and also a good thing for Europe and the Euro.
There will still be major benefits to being part of the EU, but there are also benefits from not being part of the EU — and they cut both ways.
I say eject Greece and focus on building a strong EU. If you can’t let a chronically weak division fail then you are not going to have a strong company.
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Makes a lot of sense, Kris. The only problem as I understand it is that there is no formal mechanism within the EU charter currently to evict a badly performing divsion (country). There would have to be an amendment to the EU charter that is ratified by all members. Not sure if there is enough support within the EU to get that done. Will certainly be interesting to watch.
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