Crisis? What crisis?
There’s a big crisis in Greece.
Yes, Greece. You might have heard of it. It’s a smallish country in the Mediterranean. It borders on Albania, Bulgaria, Macedonia, and Turkey. Also, it’s the cradle of western civilization.
Oh, right, they invented the Olympics. But why should I care about it now? Is it invading America?
Don’t be silly.
Is it an economic powerhouse?
Greece’s economy is about $240 billion, which puts it somewhere between Alabama and Louisiana, in terms of total might.
You’re not exactly scaring me, here.
But there are lots of people, especially in European financial markets, who are scared.
Why are they scared, if Greece is so small and powerless?
Well, Greece also has about $350 billion in debt. Admittedly, that’s roughly the amount of money that the US government borrows every seven months. (The total US national debt, at $18.3 trillion, is about 50 times the amount that Greece owes.)
Still, $350 billion is a lot of money. Can Greece afford to pay it back?
Greece’s lenders must have been pretty stupid, eh? I’ll bet they’re kicking themselves now.
Well, they did have a cunning plan.
Lend Greece all the money it needed to pay them back.
So, the idea was, they would just lend Greece a bunch more money, most of which will come straight back to them in the form of debt payments?
Hey, it works for the USA.
But it’s not working in Greece?
Because the power dynamics are all wrong. The USA can borrow as much as it likes, no questions asked, because it’s the USA. The borrower calls all the shots. Greece, on the other hand, can’t really borrow from anybody, which means the lenders have all the power. So they’re making various demands of Greece, and the Greek government is very unhappy with those demands.
But can’t Greece just refuse to pay? Isn’t that what it did in 2012, when it restructured its debts and forced lenders to take losses of 70 cents on the dollar?
Not with these lenders it can’t.
These are different lenders?
Oh yes. Very different.
What’s the difference?
The lenders that Greece defaulted on in 2012 were bondholders: financial lenders. They were in it for the money, and they took a risk, and the risk didn’t pay off, and they lost money. The institutions that Greece owes money to now, on the other hand, are political institutions, who lend for political reasons.
Throw an alphabet soup at me.
IMF! ECB! EU! EC! ELA! EFSF!
OK, but trust me, there’s a lot more where those came from.
Presumably, being political institutions, all of these entities are entirely sensible, rational, and predictable, and want only what’s best for themselves and for Europe in the long run.
Don’t get snarky with me, young lady. But you’re right to be suspicious of the Eurocrats. There’s a huge amount of fighting within and between Greece’s lenders, before you even start looking at the fraught negotiations with Greece itself.
“Greece”, of course, being a well-defined political entity with clearly-delineated positions and perfect internal consistency.
I’m warning you, three strikes and you’re out. But again your suspicions are on the nail. The Greek people elected a ragtag coalition of leftists, most of whom ran under a vaguely-defined “Syriza” umbrella, but few of whom can actually agree on much. It’s not even clear that the prime minister and the finance minister are on the same page – and the prime minister had lost the support of a lot of his party, after his latest attempt to appease his creditors, which helps explain the most recent crazy gambit.
#Tsipref, the Tsipras referendum.
Rather than do the job for which he was elected, and negotiate with Greece’s creditors, prime minister Alexis Tsipras has decided to simply put Europe’s proposal to a referendum. He thinks that Europe is asking too much, and is going to campaign for a no vote. But if Greece votes no, then it will probably end up being forced out of the euro. On the other hand, if Greece votes yes, then Tsipras will probably end up being forced to resign, sparking a whole new election campaign right in the middle of the most fraught time in the country’s finances. Either way, the chances of Greece managing to get through this without a lot of further chaos are very, very slim.
Like, all the banks closing.
Yeah, that happened. If you have money in a Greek bank account, there's no a very high probability that your money will be forcibly converted into drachmas, or some other new currency, and will be worth much less than it is in euros. So the sensible thing to do is to move those euros to Germany, or some other country which isn't about to devalue its currency. But Greece can't afford to see all of the money in its bank accounts simply leave the country. So it closed the banks.
So politically, this is a mess. And it's horrible for the Greeks. But why does any of it really matter beyond Greece's borders?
Because the eurozone never really made sense as an economic entity, and it was only political will which held it together. If Europe’s politicians can’t come to an agreement in Greece, then that could spell the beginning of the end of the great European project.
Peace in our time.
I thought you said not to be snarky.
I’m not being snarky! The European Union, the single European currency, the entire idea of Europe as a political entity – all of it was born of two world wars and the conviction that only through ever-closer political and economic union would future wars be averted.
How’s that working out?
For the first few decades after the war, it worked very well. But today the different European countries are deeply suspicious of each other. There’s an especially deep divide between the rich/creditor northern, Germanic countries and the poorer/debtor Mediterranean countries. Europe as a coherent political entity exists more in theory than in practice. And without political will, the economics simply doesn’t work.
What does that mean for Greece?
It’s looking increasingly likely that it might end up being forced out of the euro.
Greece would immediately suffer devaluation, inflation, and default: the consequences would be very painful. On the other hand, staying in the euro isn’t obviously better. Greece’s creditors are demanding severe austerity policies for decades to come, under which it’s hard to see any hope for future economic growth. At least with devaluation and default Greece can have something of a fresh start, much as Argentina did in 2002.
But the financial markets can’t really be concerned about what happens to Greece’s domestic economy, it’s tiny.
Correct. Europe’s institutions are easily big and rich enough to be able to cope with the losses from a Greek default. But they’re not big and rich enough to be able to cope with the losses from a Spanish default, let alone an Italian default. The worry is “contagion”: that if Greek savers find their euros suddenly converted to crappy drachmas, then Spanish savers and Italian savers will decide that they should probably move their euros to Germany, just to be on the safe side. The resulting bank runs could bankrupt those countries, and that would be the end of the European Union as we know it.
Is that likely?
No. It’s certainly much less likely today than it was four years ago, the last time that markets were jittery about Greece. But that doesn’t mean that European leaders want to take the risk. Especially since a Greek departure from the euro would be a grave symbolic and political blow to the entire project of ever-closer European union. The euro was designed to be a roach motel: once you joined, you could never leave. If Greece leaves regardless, then the world will never again be able to take at face value the promises of any European leaders.
So, no big change then.
I told you, three strikes. You’re out.