Thursday, July 9, 2015
Greece from an Amateur Historian and Pretend Economist
So, as you probably have heard Greece is in some pretty serious economic trouble. Massive deficits have led to unsustainable debt. The Greek government is unable to make payments on its debt and is facing the prospect of losing its ability to borrow and more importantly its inclusion in the Eurozone. Greek banks are essentially out of money currently while the other Eurozone nations work to decide if Greece will be offered another bailout and what terms it will have.
Despite the imminent crisis the Greek government refused a bailout that was offered to the them. The terms basically were for Greece to increase taxes and drastically cut spending yet again. The Greek Government and later its voters were reasonable in turning down the offer. The austerity plan Greece has been under since taking its first bailout has shrunk the Greek economy on a level than can be termed a depression.
Greece was faced with 3 choices:
1.) Accept the bailout and face a worsening economy, but at least the currency would be stable.
2.) Flatout refuse any bailout and adopt a new currency which would be disastrous, but at least there is a way for Greece to recover in theory.
3.) Refuse the bailout, leverage the risk of #2 as well as other things to try to get a better deal.
Greece has chosen option #3 and have left the powers that be to decide how to handle the situation. After Greeks overwhelmingly voted to oppose the bailout terms Sunday, this week has seen some European nations soften their line while others haven't really done so.
The most significant issue as I see it is the matter of debt relief. Greece's debt is unsustainable no matter what the bailout terms are. If its creditors refuse to forgive some of Greece's debt but offer a bailout, this will keep happening again and again. The power-player in the Eurozone is Germany, which has flat out refused the idea of debt relief.
The political, social and economic issues here are very complex. Greece elected a liberal government early this year, which brought in an anti-austerity platform. This government has up to very recently refused to 'play ball' in the negotiations. German sentiment towards debt is that it is a blood oath to borrow money and one must alway pay their debts. Germans don't forgive debt. Germans are stringent rule-followers. The overriding fear amongst all parties involved is that if a solution is not found and Greece is forced out of the Eurozone that it would almost certainly spark a humanitarian crisis in Greece.
Greece holds a special place in the West. The first great western civilization(not really true, but that is the narrative.) The home of great thinkers like Plato and Socrates. The Parthenon. The Gods and Goddesses. The Myths. Alexander the Great. The west has sought almost since the fall of the Greek Empire to protect Greece. The risk of turning Greece into a failed state is something that may be unthinkable to some.
More important than the history of ancient Greece is the history of 20th century Germany. Europe knows the risk of having a nation with a crumbling economy. The winners of World War I forced Germany to pay impossible to pay reparations as part of the Treaty of Versailles. Germany was forced to pay in Gold and Goods. The amount of gold backing German currency dwindled. This would lead to a period of hyperinflation in the Early 20s in Germany. In response to this the German government created austerity programs that crippled the German economy, which led to the rise of the Nazi Party & Adolf Hitler.
The fear is that if Greece is forced out of the Eurozone it would have to print its own money. Greece's huge debt obligation and need to have a functioning government could lead to the printing of a lot of this new currency. A state needs a way to fund its deficit and if Greece is unable to borrow it would have to print more money, which can rapidly lead to hyper-inflation. The badly damaged economy risks a) a power vacuum or b) dangerous groups being able to rise within the Greece structure.
I personally think that Europe's continued fears of repeating the mistakes (very justified) of the years between the world wars means there will end up being a deal of some sort this weekend. The biggest stumbling block, oddly enough, will be Germany. It also seems likely to me that any deal that will be reached will be a stop-gap solution with limited or no debt relief for Greece meaning we'll come back to this situation again.
Thanks for reading.