By Tom Cushing
Greece is The WordUploaded: Jul 7, 2015
It's on everybody's lips as the world grasps for a narrative to explain the contemporary Greek tragedy, and point the way to a stable future. Then we can all breathe a sigh of relief and return to our cat videos. Here's my take.
1 ? the Greek economy is tiny ? about 1/10 the size of California's GDP, having fallen by 25% since 2008; its population is 11 million (just a couple of interesting factoids, for context).
2 ? the Greek economy is corrupt, with tax evasion rampant, reckless spending, generally poor attention to the Rule of Law, and over-generous social benefits, especially given the low level of tax compliance.
3 ? 2, above, is a tradition of very long standing, and should surprise no one.
4 ? the Eurozone as a currency union has been fundamentally flawed from the outset, because there is no unifying political authority that can provide a correction mechanism when individual economies go bad. They just never anticipated the need. In the US, by contrast, creditor states like California bail out debtor states like Mississippi all the time.
5 ? thus, the EU is trying to force reforms economically, by withholding funds needed for liquidity (daily living transactions, personal 'working capital,' if you will), unless/until the Greeks make numerous and drastic economic reforms.
6 ? every bad loan has two mistaken parties ? the borrower unable to pay, and the lender who made the risky loan, sometimes with plenty of forewarning that the borrower would default (see the US mortgage debt crisis of the last decade).
7 ? when 6 happens, there is no good principle that calls for All the consequences of Both lapses of judgment to fall only on one party, the debtor.
8 ? it has been well-known to Greece's creditors since 2010 or earlier, that the Greek economy simply could not support the "austerity" reforms that were being consciously forced on it by its creditors at the IMF and elsewhere. It was never going to work, and the creditors knew it -- but at least they would be paid in the interim.
9 ? further, the draconian austerity 'reforms' forced on the Greeks particularly, and adopted by the EU in general are precisely the Wrong medicine to apply in a recessionary spiral ? they make matters worse by further reducing 'demand' that is already insufficient in a lagging economy. The US, by contrast, at least took some half-measures to inject demand into its economy ('the stimulus'), with much (much) better results in terms of economic recovery. When the flow is inadequate, you prime the pump -- you don't pinch the hose.
10 ? not every nation in the loose confederation of the European Union has chosen to use the Euro as its currency. The UK and Iceland, for example, have retained their currency autonomy.
11 ? the best thing for Greece to do, long term, is to Regain its currency autonomy, and devalue its new drachma -- to the point where Greek goods and services are attractive to the holders of stronger currencies. Add-in capital controls and you have monetary policy that primes the pump. We won't see many Greek tourists for a while as a result, but it provides a route up and out of this slow motion train wreck. Iceland did this after its disastrous flirtation with bubble-based banking economics in 2005. They're doing much better, thanks.
12 ? In the shorter term, 11 will mean that Greece's creditors will "get a haircut" ? the default risk they assumed when they made the loans will come to pass, and the stiff-backed governments they counted-on to avoid their losses will have failed to protect them. The Germans, in particular, have been playing 'the heavy' in this crisis, apparently oblivious to the mercy they received from the world in the form of loan forgiveness after both World Wars. The Greek citizenry will also suffer deeply, at least until it can get its renewed currency into circulation.
13 ? the only real practical alternative to 12 is a formal bailout of Greece. That would have much the same effect, but is much more orderly. It would avoid setting a precedent for other debtor nations in the Euro currency union, but it would not really address the need for Greece to devalue its particular currency.
14 ? there's always some ethical concern -- "moral hazard" is the term-du-jour -- when anyone escapes the consequences of their prior bad decisions, whether it's personal or national bankruptcy. But the Greek nation has already suffered greatly, and most Greeks, like most citizens of any country, are only very slightly 'to blame' for this debacle. And often a bail-out is the best, quickest solution for all concerned.
15 -- That may simply not be true, here. Greek self-help will provoke an immediate humanitarian crisis as the 11 million struggle mightily to meet their daily needs, but I don't think it needs to incite an international panic, especially given 1, above.
And who wouldn't enjoy a nice interlude on their islands ? at half the price?
Anyway, that's what I think ? you?