In the two previous entries, we discovered interesting twists and turns concerning this myth. Martha Stewart tried to take on Procter & Gamble (PG) with a detergent no better than plain water. Cigarette companies support anti-smoking messages, while reaping massive profits for themselves and tax revenue for the government. Let’s see what other curious situations we can stir up.
Summer Theater Comes to a Close
Over the last few months, Europe has been working out its currency battle with Greece. As readers know from past entries, the Myth Buster believes that the euro is here to stay despite its stresses and strains. It should have been as plain as the nose on your face that the euro would win out. Greece has agreed to some form of austerity, so the curtain falls on the 2015 drama. The euro has prevailed.
Imagine Greece on its own, returning to the drachma. In an economic crisis, they would quickly devalue their currency, plummeting into another economic whirlwind. Such a move would further damage the fragile economy, raise unemployment and undercut savings and liquidity. No one would trade with Greece. There would be no bailouts from the euro zone powers. The International Monetary Fund would remain silent. Conditions would be worse than the Great Depression.
Despite the obviousness of this, many observers focus on the bailout(s): Are they the right thing to do? How big? When will they happen? What will happen to interest rates? It appears that Greece will wind up with a financially tougher deal than Greek voters rejected. But if they enact the euro-deal, the one engineered by the major euro-zone countries, it carries advantages. They stay in the euro zone, which virtually guarantees bailouts and the opportunity to come back into the fold with a restored economy.
Two Viable Options for Greece
What can Greece do? First, they can move slowly and cautiously to repair their economy – cut government spending; stimulate private enterprise. The alternative is to accept the tough terms imposed by the euro powers and move rapidly to get back on track. The question is whether they will adjust faster or slower. Yet, the euro naysayers persist. Much of this stems from seeing the euro in political terms, which fuels the view that the euro traps the weaker economies in a German financial headlock. Despite the rebound of Ireland, Spain and Portugal, the critics continue. Wikipedia even carries an entry on “Euroscepticism.” For a time, the drama will continue as Greece’s debt service deadlines approach. There will be a lot of yes-or-no hand wrenching prior to temporary agreements. Many pundits will weigh in. Expect to see a long-term solution take hold.
Euro 1, Naysayers 0
The success of the euro should be as plain as the nose on one’s face. When one looks at the gloomy business news from Europe, success may be an odd word The euro itself is on a slide and may reach parity with the dollar this year ($1.11 as of mid-August). A few years ago it stood at $1.60. On top of the economic slowdown, Greece irritates the other 18 members of the zone by defaulting and initially rejecting austerity. Critics point out accurately that the euro would be stronger without Greece.
So, why does the Myth Buster see success in the euro? The euro is taking a hit for the overall somnolence of the European economy. The euro is only a currency and Greece has become its lightning rod. If they withdrew from the euro arrangement, it would not boost the overall European economy and would spell certain disaster for Greece. So, we are witnessing a political drama more than an economic upheaval.
In addition, other Eastern European countries continue to angle to get into the euro zone and would gladly change places with Greece. The Summer Drama has also shifted the economic telescope away from Turkey, which faces its own economic woes. The current crisis will end when attention shifts back to the country that straddles Europe and Asia. As of August, 2015, Greek debt ten-year interest comes in at 9.55% (mid-August), well down from about 19% in July, and well above 2.01% for Spain and 2.49% for Portugal.
Best Actor? Best Actress?
Drama is the key word. The Tony’s do not include Off Broadway, but they recognize Regional Theater. The Greek Crisis qualifies. How about Best Actor in a Predictable Drama (method acting?) or Best Actress in an Extremely Public Sturm und Drang?
This myth has proven quite insightful. It also reveals how “Smart Markets” work. Only the well-informed investor grasps the implications of business events and acts upon them. Sometimes obvious facts escape pretty smart people. The three entries on this myth showed that it also operates on many levels. The Myth Buster and a friend once visited a small lumber yard. On the counter near the cash register was an empty fish bowl with a sign that read: “Anyone Who Mentions Home Depot Must Deposit a Dollar in This Bowl.” This type of mismatch between customer expectations and the products and services being offered is quite common. Diners at a Northern Italian restaurant may ask frustrating questions, “What do you mean you don’t have spaghetti! Isn’t this an Italian restaurant?” Imagine how many times the Maitre D’ has been called over and begins by saying, “Yes, sir, but you see in Northern Italy…” Imagine how many prosecuting attorneys resting their hands on a pile of convincing evidence swallow hard when the defendant pleads “Not guilty.”
Next month, we will tackle another intriguing myth that makes us think about our strongest-held assumptions.
Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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