Why Greece will keep the Euro

I recently finished Thomas Piketty main book «Capital in the 21st Century» which contains a series of very interesting observations on the dynamics of wealth and (labor) income. The one that struck me the most is the fact that in cases where income and population growth is low (something that was basically true for the most part of human history until the Industrial Revolution), inherited wealth becomes very important for wealth holdings. Exactly the opposite happens when population growth is large (hence most children inherit almost nothing) and when income growth is significant and thus wealth accumulated through saved income becomes important in determining total wealth.

The above dynamic is quite evident in the case of Greece. First of all, population is actually falling with fertility rates at 1.3 children/woman. This means that most children grow up without any siblings and thus end up inheriting all of the family wealth (75% of all households have no more than 3 members):

Moreover, median income has fallen back to 2004 levels. The very large debt burden, high NPL ratios and the requirement for significant primary surpluses for decades to come indicates that Greece faces a significant risk of walking an Italian path in the following decades: Income growth will be stagnant while debt loads will stay high with a large part of income devoted to servicing old debts instead of financing investment and growth.

In such a setting, past wealth and assets become the determining factor for a person’s total wealth with current income not being able to create new saving and wealth flows. Actually, as I outlined in a previous post, Greek households are consuming past wealth on a grand scale in order to be able to finance current consumption, a reasonable outcome of the 26% fall in median income since 2010. According to recent figures, gross saving was a whooping -7% in 2017.

According to BoG Financial Accounts, more than 60% of household financial assets is in the form of currency and deposits and another 23% in unlisted shares. The rest of household wealth is probably in the form of housing. Listed shares (which typically are the assets that have the largest growth potential) are only 3% of total financial assets (they were 40% in the height of the 1999 stock bubble and close to 10% during the golden Euro years).

Roughly ¾ of Greek households own a primary residence with median total net wealth of 90,000€. The main residence has a median value of 70,000€ making it the most important asset while median financial assets of all households are only a couple of thousand €.

For a risk-averse person (such as the Depression hit Greek population) the main priority is wealth preservation instead of a growth potential (especially if the latter comes with a probability of a destructive tail event). Thus most people would probably prefer a low-yielding Euro asset instead of a re-denomination of wealth in drachmas. An early Grexit might have avoided the 25% drop in output and the current low-growth potential yet, as long as the Greek Depression is now considered a «sunk cost», wealth preservation takes priority and staying in the Euro becomes an attractive option, even if it coincides with low income levels and growth. The «attractiveness» of the Euro option most probably increases with wealth levels which means that it becomes a «hard-line choice» for the ruling class which has most wealth to lose/redistributed in a Grexit scenario.

The Grexit option might as well have come and gone.