Greece in a Nutshell

It all sounds very complicated and the easy explanation is they were bad, bad, bad, and now they must be punished and pay.  Except it is not quite as simple as that.  Think of it this way.  The Europeans went on the Euro and Greece got really easy money, so they took too much.  Now we have a problem here with the chicken and the egg.  Yes they got over their heads in debt, but why did Europe keep throwning money at them as they piled it up?

Okay now they hit hard times and in order to get money to keep the country afloat (pay their debts and still have some left over to grow their econom), they have to reform their system, cutting pension, investments, and everything that gives them spending money to start their economy so they can pay off their debts.  The Euro Troika, European Central Bank, International Monitary Fund, and the European Commission, have put harsh terms on Greece which is forcing them to shrink their economy to meet the payment terms, and in the process have less money to make the payments.  It is strangling their economy and is referred to as a death spiral.

Okay, here is the really essential part of this equation.  Normally when a country gets into this kind of trouble, their currency falls (less valuable than other currencies) and makes their buying power much less, but makes their goods and services more affordable spurring their economy.  The trouble is that the Greeks are on the Euro, so the currency can’t fall because all the other nations that are doing okay bouy it up.  So they are locked in to what has been referred to as a death spiral. The more they pay on their debt, the less money they have for their economy, and it shrinks, leaving less money to pay on their debt.

So the choice, at least in my mind, is stay in the Euro, accept the terms of the Troika, and continue your death spiral (vote yes on the referrendum), but what Euros you have are safe, or vote no, leave the Euro, print your own currency, which will fall and people will loose some wealth, but when it stabilizes you can actually start your climb back to health because now you have a currency valuated so that it makes your goods and services very competitive.

Europe has created this crisis because they ignored this problem of a common currency with out a strong central bank to stablize the bank structure and government investments as we have in the United States.  Think of it this way (again overly simple):  First, there cannot be a run on the banks because they are all insured.  Second, all the Social Security, Medicare, various aid progrms, and other government spending still goes on in a state that might have this problem.  

For instance if you look only at how much the federal government spends per person in each state compared with the amount its citizens pay in federal income taxes, South Carolina receives a whopping $7.87 back from Washington for every $1 its citizens pay in federal tax. Source:  The Atlantic.com.  In other words, the federal government bouys up spending and their economy until better times come along.

So what should the Greeks do?  This is a no brainer and I was amazed to see two usually conflicting economists, Peter Morici and Jared Bernstein on MSNBC’s The Cycle today both agree on this one. They should vote no and end the hostage taking.  Jared thought the no vote would give them better negociating position in the hope they could stay on the root problem the Euro, and Peter thought it was time to end it.  By the way, Paul Krugman and Joseph Stiglitz also say vote no.  

The sad thing is that the Euro and the European Union have had a unifying effect across Europe and lessened historical strife between the member nations.  But they are strangling Greece and have left them no choice.  Maybe if the Greeks leave, the Troika will finally face the fact that they are the problem.  Much of the debt payments should have been forgiven to give Greece a decent chance to get back on her feet.  But the austerity meisters who believe in punishment instead of good economics could not stand for that.  Vote No Greece. Shake off your chains. It’s is going to be hard, but your children will have a future.

UPDATE:  It would appear the IMF sees the folly in structuring  a solution that is unworkable and has split appart from the Troika.  This gets better and better by the moment.  This might go a long way to a no vote:  http://www.theguardian.com/business/2015/jul/02/imf-greece-needs-extra-50bn-euros?CMP=EMCNEWEML6619I2

3 Comments

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