The news is filled these days with coverage of the Greek Debt Crisis. But much of the media (and social media) coverage assumes people know what it is and what the issues are. But most people I speak to don’t understand it.
Now, I studied economics at high school, but I’m not a professional economist. However, I have followed some of the issues and will try my best to explain what I see is happening. As I do, I’m going to use a few anachronisms and generalisations, in order to simplify the presentation. For example, I’ll use the term ‘European Union’ throughout, instead of going through all the guises it had assumed before that term came into being. Also I’ll simply talk about ‘Germany’, instead of explaining its post-war division and reunification in 1990. After all, I’m aiming for simplicity. I’ll also use an analogy throughout to try to convey the situation in comprehensible terms. I’ll mix metaphors here and there, but again, I’m simply trying to illustrate what is happening.
So let’s begin.
After the two World Wars, Western Europe vowed never to let the same hostility build up again. So a number of nations committed themselves to getting along. It was like feuding neighbours decided to bury the hatchet. Enough was enough! It was time to rebuild bridges and get along.
So strong was this impetus after the experience of war that a bunch of countries decided to form a union. It’s like they’d all been living on Nationalist Avenue for too long, and the place just had too many bad memories for them. So they all decided to move to a brand new location: Union Street. That way, they could all make a fresh start with each other.
And so they did. Europe began a new chapter of cooperation and friendship. Life on Union Street was working well. The neighbours each had their own property (sovereign state), which they each started renovating (the rebuilding after World War 2). And to pay for their renovations, they all went back to their jobs.
Now, one of the neighbours on Union Street was Germany. It had been the bully back on Nationalist Avenue, but the other neighbours managed to band together and beat it to a pulp. But those other neighbours were simply trying to defend themselves. They didn’t want to kill their neighbour. So they now graciously decided to cover Germany’s medical expenses, help with its house renovations, and get it a new job once it had recovered. In other words, many of the Allied nations committed themselves to rebuilding a new, rehabilitated, and modern Germany. And for this, Germany was profoundly grateful.
Things were working out so well that some of the member states decided they wanted closer economic cooperation. So they touted the idea of a common currency that would bind their economies together, but without dissolving their own sovereignty. It’s like they decided that they would get along even better if they tore down their fences. Each neighbour would still retain its own property, but they could move about amongst each other a lot more easily.
But not all members of the union wanted this. Some, like the United Kingdom, were quite nervous about getting rid of their own currency. So, while some members took the plunge, others didn’t. They were all still happy neighbours on Union Street, whether their fence was still standing or not. But suddenly, many of the fences were gone.
By this time, Germany was strong and healthy again. The German economy quickly developed into a powerhouse. It’s like it now had the highest paying job of all the neighbours, and its house became a mansion—the envy of all the street. What’s more, Germany was one of the neighbours that had decided to pull its own fence down. In other words, it was one of the member states that adopted the common currency.
Over the years, more neighbours moved into Union Street. And more neighbours decided to tear down their fences. Things were just dandy!
Now, one of the oldest members of the union was Greece. As an economic unit, it was quite small, and it lacked significant natural resources. Basically, this meant Greece was quite dependent on imports. It’s like it had one of the smallest properties on Union Street, had a low paying job, and didn’t own many tools to be able to renovate its own house. But it joined the common currency zone—that is, it knocked down its own fence, and began to enjoy some of the freedoms that came with this.
Greece’s monetary economy started going places. It began to grow. The new common currency (the Euro) was valued much higher than Greece’s old currency (the Drachma). This created something of a windfall, and people’s wages went up. A lot! They were able to buy a lot more stuff, which meant there was a spike in imports. But because Greece doesn’t have much in the way of local resources, it didn’t have much to export in return. Its main exports were food products (fish, cheese, and olives), which don’t alter in price very much at all. And while tourism continued to be a money winner for Greece, the rise in wages meant a rise in local prices too. So tourists were still coming, but not spending quite as much. As a result, while there was a lot of cash changing hands, most of it was heading out of the country.
It’s like someone took all of Greece’s ’10’ unit bills and replaced them with brand new ’50s’. It was an instant pay rise! And Greece decided to go on a spending spree. In addition to what it would have normally bought, it could now afford more stuff. So it walked freely over to France and bought a 12-place dining setting. It went across to Italy and bought three leather lounges. And then it went over to Germany and bought an Audi Q7 4WD. And while the neighbours were still coming over to enjoy Greece’s pool, and bringing their ’50s’ with them, that ’50’ now didn’t go as far in Greece as the days when Greece was still using its own ’10s’. So the neighbours began to say, ‘I’ll still come and visit, but I might go enjoy Thailand’s pool sometimes too’.
Now while all the new stuff in Greece’s backyard looked fantastic, its monetary problems were growing. Greece was overspending and underproducing. There was an imbalance. The house wasn’t big enough for the new 12-place dining setting, or the three leather lounges. And there was only space in the garage for a little Fiat Punto. Greece was enjoying lots of new stuff, just like its other neighbours on Union Street, but it wasn’t really managing things well.
At this stage, it would’ve been good if Greece said to all its family members, ‘Right, we all need to go out and work some more, because we need to renovate the house and garage.’ But it didn’t. Instead, it let some of its family members stay home, and kept telling the kids that they’d get lots of pocket money. In reality, Greece’s public sector was enormous. Lots of people were deriving their income not from production, which might create exports to offset all the imports, but from the government, which doesn’t really produce anything. The governments of Greece didn’t really encourage new sectors and industries to create new exports. Nor did they have a properly working taxation system that might at least offset government spending with some government revenue.
Now, if Greece still had it own original currency (the Drachma), things might not have been so bad. When a country has its own currency, market forces and/or the government can make the currency appreciate or depreciate, and thereby change the value of its exports and imports. If it depreciates its own currency, its exports become cheaper and, therefore, more attractive to foreign buyers. And that can help adjust the bottom line by bringing more money into the country and attracting more investment. At the same time, you don’t want to devalue a currency too much, because that would make imports far too expensive, and locals wouldn’t be able to buy stuff. In any case, a nation with its own currency has a measure of control over the value of that currency, and therefore the value of its debt. But because Greece adopted the common currency (the Euro), its government gave up any ability to have such influence. Greece has to share the currency with another 18 neighbours. And the value of the Euro is largely determined by the market forces in the largest economies that use it: Germany and, to a lesser extent, France. And they’re not keen to compromise the stability of their own economies by artificially adjusting the value of the Euro to accommodate tiny little Greece. In other words, when Europe decided to replace all of Greece’s original ’10’ unit bills with brand new ’50s’, it was because Germany’s wallet was filled with ’50s’ (and bigger) to start with. The new currency didn’t really change all that much for Germany (if anything, it helped balance their books quite nicely), but it brought a massive change for Greece.
Nonetheless, Greece now needed to renovate its house to make room for all its new stuff. So how was it going to do this?
To pay for its increasing debts, Greece borrowed a lot of money from other nations in the European Union. And these other nations didn’t just give Greece modest amounts of money. They gave Greece ridiculous amounts of money. In fact, we could say that while Greece was irresponsible in its financial management, the rest of Europe was irresponsible in lending it so much—a bit like the sub-prime mortgages that American banks were giving to people who simply couldn’t afford to pay their mortgages back. But because the economic configuration of Greece didn’t really change and the value of the Euro stayed pretty steady, Greece’s debt situation didn’t ease. In fact, it kept growing. It’s like the 12-place dining setting now seated 24, the three leather lounges had turned into eight, and the Audi Q7 4WD had also spawned a Porsche Carrera and a Mercedes C Class convertible. And Greece had to find room for the lot—now! So Germany, in a spirit of friendship that Union Street was now known for, convinced Greece to borrow its drill to try and help with the renovations. To Germany, the drill was pretty normal—it worked just fine in its own mansion. But when poor little Greece brought the drill home, it found the drill was more like a jackhammer. And when it started to use it, it couldn’t control it. So instead of renovating its own house, Greece actually wrecked it! At first, everyone thought all the noise coming from Greece’s house was good construction noise. But pretty soon, as Greece’s house started to collapse, the neighbours began to realise something was very wrong.
As the Greek economy collapsed through its inability to repay its debt, it also began losing its ability to restructure its own economy to try and reduce the damage. The walls came down, electricity was cut, the plumbing broke, and now… Germany’s mega drill was also broken, and Greece had no way to fix it. The pool was still intact—but with no house, Greece was losing its ability to entertain its guests.
That’s how Greece has come to its current debt crisis. It has lost just about everything. Why? Because:
- the common currency artificially inflated its economy;
- Greece’s taxations systems couldn’t sustain its bloated public sector; and
- the spirit of cooperation in the Euro zone actually encouraged financial irresponsibility amongst all parties.
So what has happened just recently?
Europe wants/needs the money it lent Greece back. But because Greece has no way of paying it back, Europe is now in a bind: where can the money come from?
The neighbours on Union Street have gotten together and, with Germany as their main spokesperson, told Greece, “We want the drill back.”
“It’s broken!” comes the response.
But this is where Europe’s response to Greece now makes no sense. Most economists will tell you that in order to revive an economy, you need to pump money into it. That way, production can get a kick start, things can be bought and sold, and money can start flowing again. To change the metaphors slightly, you give it a blood transfusion, rather than try to bleed it. But instead, Europe (led by Germany) is demanding Greece give up all its money and productivity (not that it has any left now) in order to pay its debt—that is, to bleed money out of its economy.
So back to our neighbours on Union Street. The situation now is like the neighbours on Union Street have gotten together, asked Germany to speak for them, and are having the following conversation with Greece:
GERMANY: Right, in order to give us back the drill you borrowed, you’re going to have to quit your job, so you don’t have any more money to go spending.
GREECE: But the drill’s broken. If I quit my job, how am I going to repair the drill or get you a new one?
GERMANY: But when you get money, you go spending it all. That’s what got you into this fix in the first place. So no job for you!
GREECE: But I don’t make a lot of my own stuff. I have to get it from somewhere else. And I need money for that.
GERMANY: Well maybe you should’ve bought less.
GREECE: But on Union Street, we’re all trying to be equal, right? Why should you have more than I have? Aren’t I free to have the same things you do?
GERMANY: <annoyed> That’s not the point! Look at what you’ve done to my drill! I want it back. Now!
GREECE: Then you need to give me time to keep working so I can eventually get you one. But honestly, I don’t know how I’m going to be able to afford it.
GERMANY: Stop making excuses! You either quit your job, or we’ll break your legs to make sure you don’t work, so you can stop spending money. <pulls out a crowbar>
GREECE: But how will that pay for the drill? And if I can’t work, how am I supposed to get food to eat?
FRANCE <whispers to Germany>: Um, maybe we should just forget about the drill. Maybe we should just ask Greece for a set of screwdrivers instead?
GERMANY <whispering back>: It was a drill that Greece broke! It’s a drill we’re going to get back! If Greece is a responsible neighbour, then it needs to give the drill back. I gave my drill out of the kindness of my own heart, and now I need it.
GREECE: I might be able to work for a set of screwdrivers. I just need some time.
GERMANY: No! You either agree to give up your job and give me back the drill, or I’ll break your legs to make sure you can’t get any more money until you give me my drill back.
FRANCE: Steady on, Germany! We’re all neighbours here. We’re all meant to get along.
GERMANY: This little pipsqueak has been irresponsible from the very start! Don’t blame me for being kind by lending Greece my drill and now needing it back. If Greece was a good neighbour, Greece would give me my drill back. <taps the crowbar>
GREECE: But I can’t if I don’t have a job!
GERMANY: Then sell stuff.
GREECE: Like what?
GERMANY: Let Luxembourg go through all the stuff you have left, and have a garage sale.
GREECE: But it’s not worth much. And then I’ll have absolutely nothing.
GERMANY: But I might have my drill back by then.
GREECE: If I have nothing, I’m going to starve! <gets faint and wobbly>
GERMANY <taps crowbar> Are you a good neighbour or aren’t you? I lent you my drill. Can I trust you to give it back?
FINLAND: We can’t trust you, Greece! ‘No soup for you!’
GREECE: OK, wait! Let me ask the family.
<Greece turns away and confers with the family, before returning to the conversation>
GERMANY: Are you serious?
GREECE: Remember how kind we were to you after you got all bashed up back on Nationalist Avenue? Why can’t you extend me the same courtesy?
GERMANY: That was different—I almost died! It was an actual emergency. Remember how kind I was lending you my drill when you were in a fix?
GREECE: Without a job to get food, I’m going to die. This is an emergency now. <thinks to self> Maybe I should abandon everything here, move to another part of the street, put a fence back up, and start all over…
NETHERLANDS: I think we should all move into a kibbutz.
GERMANY: The drill… Now!
At this point of the conversation, Greece faints. In the meantime, Europe has decided that it will now put Greece into a medically induced coma, to stop it from spending any more money, and trying to get out of its responsibilities. And while Greece is in a coma, Europe will have a garage sale to sell off Greece’s remaining assets, so that the drill can be replaced with the proceeds.
If Greece ever wakes up from the coma, it’s anyone’s guess where it’ll be. But right now, Union Street is starting to look a little too much like the old Nationalist Avenue that saw so much strife and discord between these now ‘friendly’ neighbours.
The reality is that the Greek economy has collapsed under the weight of its debt. In the space of a few years, the entire population has gone from relative prosperity to the brink of bankruptcy. Many don’t know where the next meal will come from. Medical supplies can’t be replenished. And the banks are on the verge of ruin. Everyone is about to lose! Yes, Greece has been financially irresponsible for a long time, but the rest of Europe bears some blame for how it has mishandled the situation. Europe’s proposed solution to the crisis makes no economic sense, and yet it seems poised to implement it. Such punitive measures can only become a breeding ground for extremist ideologies.
The recently resigned Greek finance minister, Yanis Varoufakis, likened the current European proposal to a new Versailles Treaty—the treaty that knocked Germany down after World War 1 and kicked it so hard that it concussed the German public into thinking the Nazi Party was a good idea. While current day Greece does not have the stature that Germany of a century ago had, this proposal could start spreading the seeds of something quite sinister.
Personally, I think Greece needs to leave the Euro zone—to reboot its economy with its own currency (the Drachma) and thereby gain some control over the value of its debt. But this goes against all the values of a European ‘union’, that is is meant to bring nations together, not fling them apart. Whatever happens, it won’t be pretty. Greece will certainly be in an economic coma for a few years. However, if Greece is able to rebuild its economy with its own currency, this will inevitably send shockwaves through the Euro zone that shares the common currency. And that could see other marginal nations exiting the Euro zone, too. And that will be an enormous political crisis.
We are now testing whether there really is such a thing as a ‘European Union’. Underneath this economic crisis is a bigger political crisis.
Note: In my ‘conversation’ script, I’m not intending to characterise all Greeks and Germans in monochrome ways. I’m merely trying to capture the tenor of the political negotiations between the governing officials of the countries involved. There will, undoubtedly, be much variation of opinion amongst the respective populations at large.