Siegel: EU Sets Bad Precedent With Greece

As turmoil continues in Greece, investment legend Jeremy Siegel believes the tough line is the way forward.

Founder & CEO
Reviewed by: Jim Wiandt
Edited by: Jim Wiandt

LONDON – As turmoil continues in Greece, investment legend Jeremy Siegel believes the tough line is the way forward. Why give in to Greece when other peripheral countries have struggled through?

And if Greece did leave the Eurozone, Siegel argues the country would “muddle through” and ultimately would still be one of the best and most competitive holiday destinations. founder Jim Wiandt interviewed Siegel about the Greek referendum, currency options for the future and the potential risk of contagion amongst neighbouring regions.

Jim Wiandt: What do you think is the way forward on Greece for Europe?

Jeremy Siegel: Honestly, I believe in being very tough here, because we’ve had other countries with problems like Portugal, Spain and Ireland abiding by their responsibilities and obligations, and how does it look if someone else can get a much better deal by holding a referendum and acting tough? That sends an extremely bad signal unfortunately and it would be great if Greece abided, but I think it [the referendum] opens up a can of worms that will more greatly undermine the Eurozone and feed the support for the left-wing parties that certainly do exist and have been coming up in those countries.

I worry much more about that, so my feeling is they shouldn’t run a referendum to allow them to get a better deal. This is the deal, this was the last deal. If you’re ready to accept it, then we’ll talk to you about extending the credit and keeping your banks open.

I think that there will be more disunity by giving in to the Greeks on the left and everywhere else than there would be in standing firm and saying, “If you want support for your banks, this was the last deal”, and I think the last deal wasn’t bad. There was some negotiation there, so it was better than what was on the table before.

Alexis Tsipras should have said, in my opinion, “Listen. I did negotiate a better deal. Let’s go with that.”

Wiandt: Do you think that Europe should then kick Greece out?

Siegel: I don’t think they should be kicked out of the EU. Honestly. That’s another step. Even Britain is in the EU and you don’t have to have that [single] currency.

My statement is not to say: “You’re out”, but “This is the deal. We will not extend more credit to the banks.” Then they’re going to muddle through. They may have a floating drop into the Euro. They might adopt two currencies, and that’s a possibility.

Gresham’s law dictates you can’t have two currencies, but that only applies if there’s a fixed exchange rate between them. If there’s a floating exchange rate, there are many cases in history where you have two currencies that are floating. If the Greeks want to use the Euro, I would say, “Fine.”

But by not extending credit to the banks, they are going to have to think of a way to try to monetise these deposits in some form or other.

Wiandt: Knowing everything you know now about what’s going on in Greece and Europe, would you buy the U.S.-listed Greek equity ETF, GREK?

Siegel: I’ve been looking at GREK and it’s only down about seven to eight percent from the day before the referendum and I think there’s a lot of optimism that a deal will be reached. But I worry that if they do reach a deal, there will be a sign of relief in the short run but if there are rumblings among the other peripheral countries, among the left and the right, with these countries wondering: “Why do we give in?”, and all that, there’s going to be more trouble later on for Europe down the road.

My book is called “Stocks for the Long Run”, so I would think of the long run consequences – and I think that they could be very bad.

Wiandt: What do you think of the prospects of Greece ever again having a viable economy?

Siegel: Basically, if they go for their old currency, it will be devalued and they will be competitive in the world markets. They’ll be one of the cheapest places to take a fantastic vacation in Europe. Their exports will be cheap. Sure, their real wages will go down. They’re probably going to go down more than the austerity programme had intended. That’s because the prices will go up in terms of the currencies that they effectively use.

That’s how, throughout history, countries that get in those problems devalue. There is short-run pain. Then you become competitive in the longer run.

I still think that Greece is one of the greatest vacation places in Europe and it will still muddle on in its governmental forms as it has for a long time, never reaching the standard of living that most of the other EU countries reach, but clearly they seem to want a lifestyle that muddles through, more than working the hard life of the Germans. So that’s a cultural choice.

Wiandt: And what about the contagion risk for the peripheral countries that you’ve mentioned in Europe?

Siegel: I think it’s very low. So let’s assume that the Greeks don’t get more cash, the banks can’t reopen and all that. There will be concerns about the banks in Portugal, and maybe some of the banks in Spain. Draghi will stop any bank runs that will spread beyond Greece and I do not believe there will be any contagion.

Jim Wiandt is founder of and ETF Report. He founded in 2001, creating the central hub for information and analysis on indexes, index funds and ETFs. Wiandt then acquired "Indexes: The Journal of Index Issues" from Dow Jones. In 2003, he purchased the Exchange-Traded Funds Report.