The whole charade of the massive Greek debt gets crazier by the day. It seems (to me) that Greece just accepts new loans as a means to roll over its existing debts. Meanwhile, the Greek economy plunges ever deeper into recession. So what will the German do if Greece finally demands a total write-off of their debts?
I realize that Greece is part of the EC and the Euro Zone-but it seems foolish to throw good money after bad, and that Greece will never be able to to pay back any but a very small fraction of what it owes
Or maybe the country can have a massive liquidation sale? at what point will the big contributors to the euro (Germany, Netherlands, France) just say enough?
The possibility of default must exist, a loan is a bet, otherwise you’re making a deal with a mob bookie. To wit, here the powerful French and German banks can’t lose and their taxpaying citizens cant win.
Centralized fiscal authority is the outcome inpredict. Or the EU disolving.
I think the consensus is that they are going to kick the can down the road a while.
From my non-expert viewpoint: it’s time to acknowledge the facts, let Greece leave the Euro, and have Europe suffer the consequences. This will bring temporary economic harm to all of Europe, but it’s better than attempting to continue the status quo indefinitely. If Germany and Greece continue to play a game of ‘chicken’ on the national stage, it will lead to uncertainty and roiling markets for as long as it goes on. Hoping that the overgrown children who currently govern Greece will start to act differently will not accomplish anything.
And what happens to Greece? Sadly, my fear is that they’ll end up like Argentina: endlessly careening from one failed government and economic crisis to the next. I don’t want that to happen, and neither does anyone else, but there may not be any way to avoid it.
There are two choices:
Either the EU continues to support Greece indefinitely or we get a Greek exit (aka Grexit) from the EU and its currency.
Neither is really tolerable which is why the EU says some strong words then gives Greece a small loan over and over.
The problem is with giving loans there is no end in sight. The Greeks have shown no stomach to do the necessary reforms needed to get their fiscal house in order. In particular revamping their tax system and stopping the flat-out rampant and egregious tax evasion the whole country engages in. Tax evasion is like a national sport to them.
If the EU lets them collapse then you have contagion effects. Greece will almost certainly default on its payments. The whole world fiscal system is a house of cards. If the EU stops bailing out Greece they will likely have to bail out banks instead who will collapse if the reality of Greek non-payment becomes a reality. If one bank collapses it likely will cause another to go under and so on ala Lehman Brothers in the US back in 2008.
Further, the Euro would be devalued as a whole with all the knock-on effects that would entail.
Finally, you’d have Greece likely descend into a right mess. They already have a very strong fascist movement growing there. Economic instability opens the door wide for those sorts to come to power (nothing new there…IIRC it is how Mussolini came to power). The EU really, really does not want that on their doorstep.
In short, it is a mess.
Greece exiting the Euro would probably be good for Greece in the long run. One of the problems they have right now is they are tied to the Euro and cannot devalue their currency to help stabilize their market. If they still used drachmas and the value of the drachma to the Euro plunged, everybody would be buying cheap Greek olives and taking vacations in Aegean boosting their economy. Being tied to the Euro prevents this from happening. They would still have their debt, but it would give them some breathing room and inject some much needed stimulus into their economy.
For the rest of the Euro Greece leaving is not that much of a problem. Greece represents 2-3% of the European economy. The real issue here is what the breakup would mean for Italy and Spain.
The problem is not really the Grexit, which could probably be managed, but the implications for the euro, which was supposed to be a expressway to monetary, fiscal and eventually political union without any exits. If Greece can be bundled out of it, who’s next?
I’ll bet Frau Merkel has a little list…
(snip) I’ve never understood this part of economics. Why would this happen simply from devaluing the local currency? In a global world, why does devaluing local currency make local products and services cheaper? Wouldn’t Greek merchants know that their local currency is worth less and be asking for more of that local currency for their products?
Consider the US as an example.
We have debt, a lot of it, owed to a lot of people.
The US can, if it wanted, turn on the printing presses and pay off that debt. It is denominated in US dollars so, if the US owes you $100, they can print a $100 note and be done with it.
This of course will devalue the currency and make lots and lots of people very angry. It would also likely tank the world economy but that is a separate discussion.
Greece as part of the EU currency cannot turn on the printing presses so they cannot devalue their currency making it cheaper to pay off their debt. If they had their own currency they could.
To be clear there is no free ride here. Turning on the printing presses has consequences as was seen in Zimbabwe where it got waaay out of control and they started printing trillion dollar notes. You can buy Zimbabwe 100 trillion dollar bank notes on Amazon for $27 (and they are not even worth that much…more a novelty thing).
Still, while Zimbabwe went nuts and made their currency worthless a country can use their printing presses in some fashion to help manage their debt. Those party to the EU currency can’t do this.
I have some of these - I paid a lot less than $27… maybe I’ve made money on my Zimbabwe investment.
Let’s take a trip down the rabbit hole that is Keynesian economics.
First, the biggest component of GDP is wages paid to workers. Prices of goods are not particularly important to this analysis. Now, there are a few reasons why workers might not be concerned about a decrease in real wages:
[ol]
[li]Money Illusion: since workers are paid in nominal wages, they might not notice a small decrease in real wages due to inflation[/li][li]Relative wages: according to this theory, workers are primarily concerned with how their earnings compare with their peers, not the real value of how much they earn.[/li][li]Institutional factors: workers (union workers, for example) may work under wage contracts negotiated in the past. Therefore, they wouldn’t be able to adjust their nominal wages if inflation rose.[/li][/ol]
Now, the effects are often overstated, and people have been expecting Greece to leave the Euro for years, so some of it is already priced in. And if Greece tried to increase inflation too much, workers would balk and negotiate new contracts, and the effect would be negated. But because wages are sticky, Greece can trick it’s workers into working for somewhat lower wages and marginally boost its economy in the short run.
Also, those Zimbabwe dollars were selling for .30 USD back when the currency was discontinued (IIRC) and about $4-5 a few years ago. Anyone who invested in them must have made out like a bandit.
Except that devaluation is basically stealing from your creditors. If Greece (after dropping the Euro), tried to borrow money, it would face enormous interest rates. Peru did this years ago-they basically said “we won’t pay”. After that, they would up paying in another way (with high interest rates on loans). The basic problem remains: greece consumes more than it produces-you have to get the economy to improve and produce more, so as to bring your debt into line.
That last part is not true, at least recently. They have recently run a primary surplus, that is, money came in to the government that was in excess of its expenditures, before interest payments are counted (the primary surplus doesn’t consider interest payments to be consumption, I guess).
The reason why currency devaluation can help is that it’s very difficult to get someone to accept an actual pay cut. Devaluing the currency can make their pay more competitive on a global scale (importing some inflation along the way, though). For local products and services, currency devaluation won’t hurt your purchasing power the way that a pay cut does.
This isn’t an answer to the question posed, though.
Yes, if a country has debt denominated in a currency it controls, it can devalue that currency and pay off the debt easier. And so can anyone else in that country who has debt. Devaluing a currency by firing up the printing presses is basically a net transfer of wealth from creditors to debtors (which might be a good idea if the whole country is a net debtor).
But doing so doesn’t change the real price of products produced by that country.
If Greece had the drachma, and the exchange rate with the Euro suddenly went from, say 1:1 to 5:1, that wouldn’t mean that you could buy greek products and services for 1/5 as much. You’d just get inflation, and you’d pay 5 times as many drachmas as you used to have to for things. Devaluing a currency does not make things cheaper, except for existing debt.
That’s the way it works in simple Economic models in which a currency is simply a numeraire and there are no real effects of inflation, etc. That is true of the world only, if ever, in the very long run. There are all kinds of real effects of inflation due to general downward nominal wage stickiness, real devaluation of nominal debt and other fixed contracts, money illusion, etc.
Greece’s problems are not exclusively due to the ECU-they started when Greece joined the Common Market/EU. Accepting membership meant that greece had to accept the import/export trade policies of the EU. this meant that Greece could not shelter its small, inefficient industries via tariffs. So a Greek manufacturer of something made in Germany could not compete-with a small local market and no economies of scale, they could not compete. Germany wound up doing a lot of business, and they did so also by offering lots of credit. So in a sense, Germany had a big part in this disaster.
Greece was probably more concerned to lock itself into the EU’s demos, having recently come out of military dictatorship, to worry about the economic consequences.