Greece is a member of the European Union and uses the Euro. In 2008 the banking crisis caused close scrutiny of all banks and obligations; the Greek banks announced they had underestimated their loans and overestimated their ability to pay their interest. With all the other financial problems in the world, that admission made Greece a particularly high risk place to lend money and the money flow stopped. With no way to borrow, Greece approached bankruptcy. The International Monetary Fund, the European Central Bank and the European Commission issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates. As lenders, they made demands: Budget cuts, tax increases, streamlining the government, ending tax evasion. The bailout money went toward paying off Greece’s international loans; Keynesians felt that banks and financiers were benefiting and the bailout money was not making its way into the economy.
Greece missed a Tuesday deadline to repay roughly 1.5 billion euros, or $1.7 billion, to the International Monetary Fund. They have a 3.5 billion euro payment to the European Central Bank due in July. The lenders have offered financial support contingent upon several demands on domestic Greek financial and political behavior.
So, what now?
The questions are a Gordian Knot of finance and politics.
Finance: 1. Any default by a bank has unanticipated fallout. Money becomes unavailable and those constrictions starve areas unpredictably. Default by a state is worse because the interconnections are vastly more complex. The U.S. government did not support Lehman Brothers in their financial crisis after considering the options and had no idea Lehman's failure would reach as far and deep as it did. So default is open-ended. 2. This crisis is not a surprise. The banks have tried to protect themselves from this problem everyone saw coming. Still, default is open-ended. 3. The lenders view Greece as an imitation of an economy. Laws, taxes, compliance rules, import and export are all influenced by bribery and inefficiency. Their requests of Greece as a creditor--increase taxes, increased efficiencies, decreased benefits--might be reasonable as a creditor but the Greeks see this as heartless and destructive. More, Keynesians think that removing money from a financial system is inherently damaging, so paying the creditors is, to them, counterproductive. The other side of the economists--Hayek et.al.--thinks no financial system can develop without production--and the incentive for production. The EU has an unemployment rate of 9.6%, Greece has a rate of 25.6%. Most money has been withdrawn for citizens' living use; there is little money available for loans or investment--e.g. inventory, car loans, payroll, construction--so Greece looks to be in trouble regardless whose theory is right.
Politics: 1. International. The Greeks are linked by treaty and currency to the European Union. They are not terribly productive and they would not be a big loss should they leave, if viewed financially. But no country has ever left the Union before and no one has any idea what the fallout would be. What national, financial and military agreements would be broken and what would their implications be? They are a member of NATO; what are the risks there? What if the Russians or the Chinese offered a bailout, what would be the military and economic impact of that? Russians sitting at the NATO meeting? And somebody, somewhere owns this debt. 2. Domestic. By joining the EU, Greece by fiat became credit-worthy. That was simply untrue. Anyone looking at the difference between the Greek and German economic and political structure knew that. But everyone wanted the EU and it was done. That resulted in an increase in consumption in Greece funded by interest rates that were related to German, not Greek, risk. Not surprisingly, if one asks the Germans and the Greeks how to manage this problem (Pew has done this), one gets mirror image response: The Germans want a tightening of credit, a rise in taxation, a decline in benefits--Hayek without the taxes, in other words--and the Greeks want loosening credit, lower taxes and more benefits--Keynes, without the taxes. The European creditors want the German solution and that is seen as cruel and despotic in Greece who promptly elected a communist to speak for them--Prime Minister Alexis Tsipras. Tsipras has blamed the EU, particularly the Germans, for its demands and has been unwilling to take a stand on domestic improvement. Then he made a strange decision: He decided to put the creditors' austerity measures to a referendum. But the offer has been withdrawn so there is nothing to vote on. So what does any of this mean? Well, one thing is that Tsipras has no intention of being responsible for any of the consequences; he is going to blame democracy. In the Financial Times' view, Tsipras has called for, and marketed, a pending referendum vote as being about one thing — a new bailout agreement — when it is actually about another — a Greek exit from the euro.
In summary, the EU and its creators included a number of countries with wildly different economies under one currency umbrella; that was a big error. The Greeks have spent--and continue to spend--vastly more money than they produce; regardless of how this sorts out some decline in living conditions will result. The impact throughout the various other economic communities will probably be limited because the money involved is small and the crisis has been expected. The relationship with the EU--in economic and military terms--will be significant; aligning with the East and their despotic cultures makes little sense--but neither did the election of Tsipras. Tsipras' incoherent behavior over the last weeks is proof that crisis does not create heroes. Finally, in the background, is this: How should a country behave, run itself? And when will political leaders understand that basic element of hubris that the ancient Greek culture cautioned against?
Greece missed a Tuesday deadline to repay roughly 1.5 billion euros, or $1.7 billion, to the International Monetary Fund. They have a 3.5 billion euro payment to the European Central Bank due in July. The lenders have offered financial support contingent upon several demands on domestic Greek financial and political behavior.
So, what now?
The questions are a Gordian Knot of finance and politics.
Finance: 1. Any default by a bank has unanticipated fallout. Money becomes unavailable and those constrictions starve areas unpredictably. Default by a state is worse because the interconnections are vastly more complex. The U.S. government did not support Lehman Brothers in their financial crisis after considering the options and had no idea Lehman's failure would reach as far and deep as it did. So default is open-ended. 2. This crisis is not a surprise. The banks have tried to protect themselves from this problem everyone saw coming. Still, default is open-ended. 3. The lenders view Greece as an imitation of an economy. Laws, taxes, compliance rules, import and export are all influenced by bribery and inefficiency. Their requests of Greece as a creditor--increase taxes, increased efficiencies, decreased benefits--might be reasonable as a creditor but the Greeks see this as heartless and destructive. More, Keynesians think that removing money from a financial system is inherently damaging, so paying the creditors is, to them, counterproductive. The other side of the economists--Hayek et.al.--thinks no financial system can develop without production--and the incentive for production. The EU has an unemployment rate of 9.6%, Greece has a rate of 25.6%. Most money has been withdrawn for citizens' living use; there is little money available for loans or investment--e.g. inventory, car loans, payroll, construction--so Greece looks to be in trouble regardless whose theory is right.
Politics: 1. International. The Greeks are linked by treaty and currency to the European Union. They are not terribly productive and they would not be a big loss should they leave, if viewed financially. But no country has ever left the Union before and no one has any idea what the fallout would be. What national, financial and military agreements would be broken and what would their implications be? They are a member of NATO; what are the risks there? What if the Russians or the Chinese offered a bailout, what would be the military and economic impact of that? Russians sitting at the NATO meeting? And somebody, somewhere owns this debt. 2. Domestic. By joining the EU, Greece by fiat became credit-worthy. That was simply untrue. Anyone looking at the difference between the Greek and German economic and political structure knew that. But everyone wanted the EU and it was done. That resulted in an increase in consumption in Greece funded by interest rates that were related to German, not Greek, risk. Not surprisingly, if one asks the Germans and the Greeks how to manage this problem (Pew has done this), one gets mirror image response: The Germans want a tightening of credit, a rise in taxation, a decline in benefits--Hayek without the taxes, in other words--and the Greeks want loosening credit, lower taxes and more benefits--Keynes, without the taxes. The European creditors want the German solution and that is seen as cruel and despotic in Greece who promptly elected a communist to speak for them--Prime Minister Alexis Tsipras. Tsipras has blamed the EU, particularly the Germans, for its demands and has been unwilling to take a stand on domestic improvement. Then he made a strange decision: He decided to put the creditors' austerity measures to a referendum. But the offer has been withdrawn so there is nothing to vote on. So what does any of this mean? Well, one thing is that Tsipras has no intention of being responsible for any of the consequences; he is going to blame democracy. In the Financial Times' view, Tsipras has called for, and marketed, a pending referendum vote as being about one thing — a new bailout agreement — when it is actually about another — a Greek exit from the euro.
In summary, the EU and its creators included a number of countries with wildly different economies under one currency umbrella; that was a big error. The Greeks have spent--and continue to spend--vastly more money than they produce; regardless of how this sorts out some decline in living conditions will result. The impact throughout the various other economic communities will probably be limited because the money involved is small and the crisis has been expected. The relationship with the EU--in economic and military terms--will be significant; aligning with the East and their despotic cultures makes little sense--but neither did the election of Tsipras. Tsipras' incoherent behavior over the last weeks is proof that crisis does not create heroes. Finally, in the background, is this: How should a country behave, run itself? And when will political leaders understand that basic element of hubris that the ancient Greek culture cautioned against?
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