The Problem with Greece (and us)
Greece is beginning to remind me of one of those old movies of the fifties where Uncle Charlie in the big extended family is up to gambling shenanigans that embarrass the family and threaten the father’s business deals. Everyone tells him to stop but Charlie has gotten in too deep and both “Big Al” and the police are after him. If he gets arrested it will be in the papers and the father will lose millions because his investors will pull out and if he gets killed by Al, the family will be in disarray and collapse. Of course, in the old Hollywood movies, at the last minute the father goes to the legitimate creditors and pays them off and then the police arrest Al and his “collectors.” Charlie repents his foolish ways and everybody is happy. Don’t expect that to happen in Europe anytime soon.
My hunch is that Greece, Europe’s “Uncle Charlie,” is eventually going to have to do some jail time (in terms of severe economic punishment), it will default on many of its bad debts, and will eventually either pull out or be thrown out of the Euro family, and that would throw the entire “family” into disarray. The Euro Zone created some of this mess by letting in let in too many countries who had too little capability of sustaining their membership. Some of them, most notably Greece, tried to look like they were wealthy enough to walk with the big kids by (dishonestly, deceitfully, illegally) borrowing most of its wealth and putting on a show. When the global economy slumped, creditors called in their investments and Greece had to admit that it didn’t actually own the money it had been throwing around and it imploded. Now it threatens to pull the whole of the EU down with it. Hence my guess that it will eventually leave the union.
One very ominous sign of just how serious is its condition was that when the rest of Europe pull together a one trillion dollar bail out, the market tanked. I think investors looked at that and said, “Jeez, if they’re trying to fix Greece with that much money, then it must have been lot worse than we suspected. Let’s pull our money out just to be safe.”
So, what would help? One thing being talked about is for Greece to do a partial default on all of its debts, just stop paying on its commitments. But the majority of its present outgo is unrelated to debt, so that wouldn’t help much. Cancelling totally all of its loans will not solve the total package of its problems. It would still need to make enormous, horrific, painful cuts in its budget that will drive a whole lot of people into poverty.
The only big thing that could bring it back from this disaster would be a general (and international) economic recovery. If the tide rose, it would lift the boats. The US is in an analogous position, though not nearly as bad. Thought it’s hard to believe from listening to Republicans, Tea Partiers, and Fox News, most of our recent Federal deficit has come from the recession. People lost their jobs or their incomes went down and then tax revenues went down. So if we ever recover from the recession, our tax income will come up and that will make paying down the deficit a whole lot easier.
However, Greece has some other very serious problems, one of the biggest is that the Euro-Zone doesn’t have a central government. What that means is that in the US, if we have a state that goes under (like California), then Social Security, Medicare, and other federal revenue checks still flow in. But if a European Union state goes under (like Greece), nothing outside comes in, and people starve.
A second problem of being in the Euro Zone is that it doesn’t have any control over its own currency. Right now the Euro is “strong” (that is, expensive) and that means among other things that tourists are more likely to go to neighboring Turkey rather than the Parthenon and no one can afford its exports. If Greece had its own currency, it could devalue it and make its exports look cheaper and therefore sell more. That would go a long way toward helping it dig its way out of its deficit hole. Countries in Southeast Asia did this following their deep recession of 1997. They lowered the value of their money, which lowered the costs of their products and they sold boatloads of computers, CDs, TVs and, well, drugs to the US and the West. China is in fact still doing that, which has been hard on our domestic producers, but it has been good for them.
However, since Greece is a member of the European Union, it has the added problem of not owning its own currency and therefore doesn’t have the option of devaluing it. It would be like Texas saying it wanted to devalue the Dollar to lower the price of oil. It could never happen. Greece’s currency is the Euro and it can’t go down unless the entire union goes down (and don’t even think about that).
Our US situation is slightly different. We could devalue our currency a little bit but we don’t have too much to export any longer. For the last twenty-five years or so we have been supporting policies that encourage industries to move to places like China, and in the process we have been sliding steadily toward becoming a service income economy. That has helped the home offices of those industries and it has helped the international financial sectors, mainly on Wall Street, but it hasn’t been good in terms of producing anything. So, now, if we wanted to sell a bunch of stuff to help pay down our deficit, we have fewer things to sell.
Which brings me back to the conclusion that Greece’s days on the Euro are limited. The amount of spending they would have to cut to balance the national check book would be beyond imagination. You can talk all day about how they have too many government workers making too much money (and they do), but to now fire or cut all of them sufficiently to have a balanced budget would drive their economy into the stone age. If you think the riots look bad, imagine civil war. It would be ugly and the suffering brutal.
One parallel to what I’m imagining would be Argentina. You may recall that Argentina fell into an economic black hole in the early 2000s, because it had over spent and was too closely tied to the economies of South East Asia, which had tanked in 1997. Their local currency was tied to the US dollar in a way that was functionally similar to how Greece is tied to the Euro. If our economy went up, theirs went up and if ours went down, theirs went down. Usually. Under normal circumstances it would be inconceivable for them to break with the dollar. But their crisis was so severe that they were forced into inconceivable policies, one of which was to break with the dollar. They went to hell and back over the next couple of years and emerged at the end a much healthier, much more vibrant economy. Which brings me again to say to Greece: blow off the euro and save yourself from oblivion.
But I’m just a preacher from Quincy, so what do I know.