Here is a briefing on Greece’s economic mess.
Greece was once a right-wing paradise with “small government.” Hardly anybody paid taxes. Yet, over the years, governments had ladled out over-generous benefits to their cronies, obviously creating a problem. Cutting benefits and collecting more taxes would have been impossible, so they decided to borrow money.
Borrowing would be cheaper in euros than in drachmas. But Greece’s foreign debt as a percentage of its economy (gross domestic product) was too high for it to join the euro. Our good friends, investment bankers Goldman Sachs, came to the rescue.
Investment bankers Lehman Brothers routinely cooked their books with an accounting trick whereby their financial poo-poo magically vanished. It didn’t vanish in reality, however; it vanished from the books, briefly. Goldman said, “We can pull that stunt for Greece!” It “bought” a ton of Greece’s national debt, which vanished from the books. Greece then went to the euro people, said “We’re clean!” and squeaked in. Sadly, nobody asked basic questions.
Basically, the euro is unsound. It’s a currency union for vastly differing economies with a one-size-fits-all monetary policy (interest rates, money supply, exchange rate) — made worse with no fiscal union (common treasury) and no political union (federal government). That’s why Britain didn’t join it. A soundly designed currency union (e.g., 50 states and U.S. dollar) also has fiscal and political unions.
Greece ran deficits like Republican states’ (e.g., Kansas, Texas). But there was no federal government to prop it up (using funds taken from Democratic states, e.g., New York, California). To cover these deficits, Greece borrowed euros galore by issuing bonds (impressive IOUs) bought mostly by European banks.
Greek banks invested their funds in wonderful new AAA-rated investments (“derivatives”) from Wall Street. What could go wrong? Lots. Lehman Brothers (with our good friend Jeb Bush as “adviser”) crashed in 2008 and nearly took America’s economy, and the global economy, with it. Goldman’s tab came due. With fees and interest, Greece’s “rescue” now cost astronomic billions.
Greece couldn’t fix its recession in 2008 with monetary policy, printing more currency as a stimulus or devaluing it to become more competitive (having surrendered its sovereign currency, unlike Britain). It couldn’t use trade policy (tariffs on imports), being in the European Union. It couldn’t use fiscal policy by taxing less. Essentially, the eurozone is a club for rich nations, so the euro is overvalued (which suits Germany fine, but hurts Greece). So Greece’s creditors demanded “austerity” whereby wages are cut instead.
But this produces lower consumer demand, meaning that businesses sell less stuff, meaning that workers are laid off, meaning there’s lower consumer demand, etc., etc., … which weakens the economy, which weakens banks as bad loans pile up, which reduces capital, which reduces lending, which weakens the economy, etc., etc., … which reduces taxes collected, which means that loans cannot be repaid.
Fatally, those wonderful derivatives became worthless, rendering banks insolvent, so the government bailed them out, weakening public finances, so government workers were laid off, so tax collections became weaker, which meant there was even less money to repay debts.
With a massive budget deficit of 15 percent of GDP in 2010, Greece was forced to fire-sell public assets such as post offices, ports and airports. Rates were jacked up due to the wonders of the free market, further weakening the economy as profits vanished abroad.
Greece was now in a debtor’s prison. It could neither cut its way out of its mess nor grow its way out of its mess. Its economy is 25 percent smaller than it was in 2008, with unemployment over 25 percent, despite bailout loans. But its national debt has grown from 117 percent, at the start of the crisis, to a massive 177 percent of GDP. The bailouts essentially bailed out European banks that had foolishly bought Greece’s bonds.
What’s the happy ending? There isn’t one. There’s a crappy ending. Years of right-wing mythology gave Greece a moribund economy rotting with massive inequality, low taxes, low wages, high profits, small government, untaxed oligarchs, corporate cronyism and virtual monopolies. Left-wing governments could never fix these deep-seated problems, hence the borrowing. Tragically, the Greeks didn’t beware Americans bearing gifts, namely, Goldman’s rescue and Wall Street’s derivatives.
Greece has gone for another short-term fix. But for a long-term solution, some debt must be forgiven, just as Europe, including Greece, forgave Germany’s debts in 1953. This won’t happen, so Greece’s least bad solution is to leave the euro’s stranglehold and pay its debts later, at a discount (if it recovers from the austerity measures). But wouldn’t that be immoral?
Not really. There can’t be over-borrowing without over-lending. As a former commercial banker managing loans in the millions of dollars, I can assure you the debt that can’t be paid … won’t be paid.F