What’s wrong with you fucking people? Is your idea of becoming european to fuck up your economy like the British and then protest for the nanny state like the French?
Well, that’s the main reason why most eastern European EU members joined in the first place.
I don’t even know what’s going on there. Do either of you guys want to summarize?
The Greek public servants were on strike today to protest to budget cuts to their massive bureaucracy. Similarly with farmers 3 weeks ago. The cuts occurred because the government is going to be bankrupt in April. They’re depending on France and Germany to bail them out, which can only lead to further discontent and friction. According to the little I’ve read on the topic, they’re trying to prevent Greece from dragging down the rest of Europe and the Euro.
Yes, of course it is the fault of the people that government bureaucrats, bankers and corrupt industrialists brought the country to the brink of bankruptcy and the common people should be forced to suffer while the guilty parties escape scot free
Short Version
The problem is that the Greek government began borrowing to give out more benefits than it could afford, because it believed mistakenly that it could sustain the deficit. It wants to take away those benefits now, but the recipients aren’t having it. In my opinion, Greece should impose a heavy and mildly progressive tax on individuals to pay off its debts and eventually to pay back any bail out that occurs. Meanwhile, EU nations should seriously consider centralizing more EU economic power.
Long Version
How did Greece’s situation get to this point? I’m not terribly familiar with the EU, and the news coverage is horrendous. What I’ve managed to discern is this.
Back in 2002 or so, Greek abandoned its old currency for the Euro. The value of the Euro relative to other currencies was much more stable. More people and more countries used the Euro. This means two things. First, if any one group’s behavior or circumstances would devalue the Euro, it’s more likely that some other group’s behavior or circumstances would simultaneously do the opposite. In other words, the Euro has a diversified portfolio. Second, even if one group really screws up and devalues the Euro, the sheer number of people using the Euro tends to spread the costs more manageably, rather than concentrating them all on one group.
Currency’s stability matters. When a smallish country with its own less stable currency takes on lots of debt, there are two problems. First, the government may inflate its currency to make its debts more manageable. The government basically produces free money to pay for its services. This operates as a flat tax on everyone who owns the currency. If the government produces 100% more currency, the currency already out there is then only worth 50% as much. The government uses this inflation-tax money to pay off international debts, basically screwing over its citizenry and anyone who invested in its currency.
Because the currency is now worth half as much, every business in that country with debts abroad now must pay twice as much. In other words, the exchange rate just got halved. Most businesses can’t possibly pay these doubled debts, so they default and go bankrupt. These debts include both 1) direct investments by foreigners, and 2) contracts with foreign businesses. So foreign investors and businesses are now financially ruined. This produces a domino effect. Meanwhile, as local businesses are collapsing, the government is losing its sources of tax revenues. To get more money, it resorts to inflation again, exacerbating the problem.
Second, fears that the government just won’t be able to pay off a debt that big may cause investors in its currency to preemptively sell it at lower rates than it’s currently worth. They want to ditch the currency before the impending crash. The effect is that, due to investor fears, the currency rapidly loses its value in international markets. This makes it enormously harder for the government to pay off its foreign debts: each dollar pays off much less debt, so to speak.
All this is to say, a smallish country with its own currency can’t accumulate too much debt.
Greece thought it had escaped these problems when it adopted the Euro. Greece figured, “We’re small. Germany, France, Spain, etc. are big. We can borrow as much as we want. The Euro will remain stable.” Greece wanted to run a “sustainable” deficit (like the U.S.) so it could pay for more services than it could technically afford. It would count on long-term economic growth and inflation to keep the national debt manageable.
Greece ignored an obvious problem. If you run a deficit that’s barely sustainable in very good years, it will become totally unsustainable in bad years. The financial crisis happened, Greek business faltered, tax revenues fell, and suddenly Greece could barely pay the interest on its debt. My understanding is that, fortunately, Greece can’t directly inflate the Euro to try to fix the problem. What it can do is default on its debts to other countries. The lender countries (mostly Euro nations) now face the same problem of not getting money they expected, so they can’t pay their debts to other countries or to their own businesses – and so forth. It’s a domino effect that can devastate every economy involved.
Even though Greece can’t directly inflate the Euro, this will indirectly devalue it. Investors in the Euro will see the impending catastrophe, and get rid of their Euros at low prices. The Euro falls on the international market, and suddenly no Euro country can pay its debts.
Now, the EU is torn over whether to bail out Greece. Saving Greece is best for everyone, even if it means chipping in substantially. The concern is moral hazards. If the EU bails out Greece, that gives EU members an incentive to be irresponsible in borrowing: they can count on being bailed out too. Alternatively, if the EU refuses to bail out countries later, you get fury over disparate treatment, and you get the disaster that comes when a huge financial entity collapses. Think of saving Bear Sterns and letting Lehman Bros die.
Since letting Lehman die helped trigger a worldwide financial crisis, the EU has likely taken that to heart and will bail out Greece. But that leaves the problem of how to deal with, say, Spain, which is on course to encounter a similar crisis fairly soon. Ideally, Greece would impose a heavy and mildly progressive income tax to pay for its bail out over time. It should probably cut services and benefits as well. That way, Spain et al. would have an incentive to avoid being bailed out as well. But raising taxes and cutting services is a political nightmare. It’s not clear the Greek government will manage to do so.
In my view, the problem is a lack of centralized EU economic authority. Member countries are so intertwined that financially irresponsibility by one country can devastate the others. The United States has clear constitutional authority to regulate interstate commerce. The European Union is more like the U.S. under the Articles of Confederation: lots of supposedly allied sovereignties looking out for their own interests, with little concern for the external costs their behavior imposes on other states, and no overarching government with power to keep them in line.
This is my understanding, anyway, as derived from news articles and studying the financial crisis. I expect the reality is much more nuanced.
Way to adopt the American Way of Life Greece.
Zepp: This isn’t about the banking system reaping the benefits like in the US. The situation here is as Xwing described; the government was living outside its means and now it can’t. It is stuck between being unable to continue borrowing for a deficit to buy something it can’t afford: all the public spending it isn’t taxing its citizens for.
Regardless of how this turns out for Greece in regards to bailout, the crisis indicates the need for a massive restructuring or a massive tax because the government needs to balance its budget. I can only imagine the political clusterfuck that would occur if the big EU countries had to bailout smaller countries over and over and over.
For the record, I’m against anyone or government living outside their means. You don’t get what you can’t pay for. This applies to Canada and the US and everyone else.
This is more or less EXACTLY what happened in my country back at the end of the 90s, minus the possibility of bailout and people striking since we all knew it was coming, we just skipped right to kicking out our president and looting supermarkets.
Good luck with all that, I guess.
Hai, I’m Greek visitors.
Well, as far as Greek strikes go this one was pretty inconsequential. Maybe it was due to the rain, but national agency reports thousands (not even tens of thousands) of protesters out of the 370.000 or 550.000 civil servants. A few months ago the current center-left government was elected with the best margin in 30 years (10%) under the banner of a Keynesian agenda and now they have to implement measures far more austere than the plans of the former govt, which he opposed before the elections. People learnt the deficit ran at 12,7%* after the elections (in lieu of the ~5% alleged one). The measures won’t be kind to the economy (plenty of downsizing already and the credit crunch isn’t kind to viable businesses). Still, about 70% of the population supports the measures. I guess that doesn’t sound too sensational though.
Anyway, debt is part of the problem of Greece. Its terrible inefficiency is the other side of the coin. A lot of big business is interdependent with the state, about 35% of the civil sector budget is wasted (fix that and watch the debt spiral down) and tax revenue is drawn from the same people who can’t misrepresent their earnings while many well-to-do folks and self-employed people don’t pay squat. Add to that the corruption that has really spiraled during the past years. There was a good run to fix some of this stuff the years before the olympic games and the EMU, but the last 5 years were fucking disastrous with the one-stop points of contact between state and citizen being left untended, the disuse of the law regulating who gets hired in the civil sector, scandals that are only now re-examined and not actually promoting any of the structural changes the economy needs.
That said, acting as if economies work in a vacuum wrt speculation is stupid. The service of our debt is burdensome but the markets don’t always reflect that e.g. the spread between then Greek and German bonds (higher price of the Greek bonds to reflect the higher risk of holding them) had been rising, then Greece got 3x the sum it wanted sometime during the last two weeks and then the spread continued rising. Okay.
The greatest risk IMO is another downgrade of the Greek debt by a rating agency, especially as the E(M?)U entrusts the agencies with rating its members -not the best of policies if you ask me, considering all these AAA assets that turned to junk during the last years.
Now considering perception is pretty important, it seems DE/FR have decided to act against weaker members getting slowly picked off by markets (Ireland, Greece, Portugal, Spain) and may respond in today’s EU council. Btw Eurostat unconditionally trusting the Greek Stat Agency so soon after the last Greek statistics fiasco was either wishful thinking or stupid. I’m frankly too bored to write about the Euro.
Anyway, it’s a coincidence things started moving when Greece agreed to purchase French and German weapons again.
Pff, one thing leads to another so if you want any further info ask away.
Kilmore, this is not so much a problem of people buying Porsches they can’t afford as structural and corruption problems. If you want a seized Porsche there are plenty of models available though 
*of course as soon as the deficit had to be recalculated the cost of military purchases was added to the last year so as to get it over with and show a rapid decrease next year.
And somehow “the Vampire Squid” a.k.a. Goldman Sachs got involved in this mess, making some dough in the process. http://www.spiegel.de/international/europe/0,1518,676634,00.html
The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period – to be exchanged back into the original currencies at a later date.
I wonder what these fictional exchange rates were. But if we got that money when the euro/$ ratio was 0,88 to 1,01 and judging by the rates since the end of 2006 we pay off that amount with an exhange rate ~1,30 we save a good chunk of money.