Granted this might not be the most exciting titled blog I’ve ever written but it is probably the one that makes most sense. I’ve decided to write my easy to understand guide to Greece and the Euro based on common-sense and my memories of international economics classes.
Greece has given the world much. Ideals of democracy, political theories, sporting events and many fine foods. It was also the first country to default on its debts back in 377BC. For much of the last 5 years though it seems to have also given the wider world Grimbo or never ending financial Greek limbo.
You’d be forgiven for thinking that the Greek economy must be one of the leading economies in the world for all the fuss that is made of it but the reality is that its entire population is around 11 million, perhaps a little smaller than metropolitan London and dwarfed by the 500 million strong European population as a whole. It’s economy is in fact just 2% of the European whole which in statistical terms is pretty much just a margin of error.
In any normal circumstance what happens to Greece and the Euro would be irrelevant on continental terms, let alone global terms and yet whilst other nations have gone into and come out of economic problems in just a few years, Greece is stumbling along with a deeply impoverished and justifiably unhappy population.
The problem lies from Greece being in such huge debt, primarily to its European allies and particularly so to German and French banks who were greedy and stupid enough to over-lend to it in the first place.
When the Euro was set-up all the member countries had to meet certain economic standards and it was noted by many at a time that Greece didn’t meet them but policy chiefs looked the other way in Berlin, Brussels and Athens in order to get things off the ground.
The Euro effectively makes most of continental Europe one country, financially… at least in parts. The European Central Bank controls the Euro and all financial policies relating to it but it doesn’t have any control over the politics of each country, in fact in many ways the European institutions are very undemocratic.
For the purposes of this argument though it means that Brussels sets economic policy within its remit for all of Europe. It is primarily aimed at the the strong economies of northern Europe which means it can be harmful and distant from those on the periphery. This can be equated to economic policy being set in London or Washington to suit the majority and it might do this quite well for most but there are always relatively deprived cities or states that don’t really fit the mould. Central policies imposed here can actually do more harm than good.
The big problem with Greece is that is has been borrowing more money than it can afford. It buys lots of goods and products from northern Europe and likes to have the same standards as for example Germany but is either not as productive, its state system not so effective at taxing and collecting the taxes and or simply prefers a different work-life balance culture.
As some economics have said, there is nothing wrong with wanting to retire early or have more holidays or shorter working weeks for example but you can’t also have the same standard of living as Denmark for example.
It’s not a one way street, you only have to look at London to see how many people from Mediterranean countries come here for work or to start a new life and likewise the numbers of British and Germans going to retire in the south is quite staggering. There is no right or wrong approach but the differences are almost as clear now as when the European project started decades ago.
If Greece still had its own currency then it would be free to set its own interest rates and currency exchange rates to meet its own needs rather than those increasingly suited to its creditor nations. It can’t do so as the currency levels of the Euro are set in Brussels.
This very obvious problem predicted particularly by the British; that you can’t have a successful economic union without a political one. Unless Brussels controls the spending levels and social policies in Greece as well as the Euro then it can never properly work as between the local Greek government and the Greek people, they will always be tempted to veer from the central economic policy set for Europe as a whole but there is no such thing as a free lunch.
The situation is doubly bad because as much as Greece and other nations have accrued debts due to the Euro, northern states such as Germany, the Netherlands and Finland have boomed. Their economies are so strong that they are too efficient for their own good, at least by Greek or Spanish standards. These currencies would have soared making Nokia phones or BMW cars unaffordable in Greece if each nation had their own currency but as all are in the Euro, Germany has managed to become richer by selling its admittedly superb products to countries that couldn’t really afford to pay for them.
As such in some ways Germany and others have almost a bigger blame for the situation as Greece does. Bizarrely, we’ve reached the situation where most of Europe is now at the economic whim of Germany, the Euro having succeeded where less peaceful German policies of times past had failed.
The blame doesn’t really start with Germany though, the Euro was foisted on it by France and Italy as “compensation” for the unification of Germany with the many other smaller countries rushing in to join if only to not be left out. However in many ways, France and Italy are just bigger versions of Greece as are Spain and Portugal and this too has compounded the problem.
The Euro when created was set up to be almost impossible for any country to leave. There are big concerns that if Greece were to leave the Euro then so too would several other southern nations. This would be doubly so if Greece were to leave and make a success of it.
So Greece is mired in a huge debt that it can never repay and a generation or more of young people have had their aspirations almost permanently ruined. Even beyond the initial debt problems, some of it is of Greece’s own makings. Ireland and Iceland have both faced similar problems and buckled down and overcome the re-structuring and now have a much healthier future ahead of them. The people there and in the financially more prudent northern countries are understandably worried and unhappy about giving their money to Greece.
This brings up another point which is how Greece sometimes forgets the whole process is a two-way street. In order for them to receive money, it is others who ultimately have to pay for them and even in a socialist EU, there are limits of goodwill if recipients are seen not to be helping themselves.
It also highlights how self-serving the European project is. Britain has always been sceptical of anything beyond a trading block but at least is open about it. In the EU there is France who is the driving force behind the EU but wholly unwilling to tackle situations such as the millions spent every year on paying French farmers subsidies to be inefficient. The likelihood of anything similar happening here is about as great as the early retirement age! In fact most of the countries nearly always oppose anything that hurts their own interests and why wouldn’t they, they are French, Greek, German first and European second.
Similarly many southern European states joined the EU purely for economic benefits, in effect being subsidised by northern states to improve their infrastructure and yet there is very little solidarity between them let alone for the northern states. Even the newly joined Eastern European states seem to be in it only for themselves rather than any European ideal. The Baltic states are amongst the strictest critics of Greece but mention limiting their population movements to Britain or Germany then you should hear the complaints.
So the Greek situation has rumbled on year after year with no-one on either side being brave enough to say the obvious thing and despite many in Europe thinking Greece and the Euro should part ways, this has not happened for fear that others indebted nations might get ideas of their own. Greece itself has repeatedly rejected the increasingly tough austerity measures and despite the results of last weeks referendum, the Greek PM has performed a huge U-turn and signed up to further measures to save the economy. Though it is unlikely it will do anything that push the problem down the road for a few months more. Either way his idea of blackmailing the whole of Europe was never really the brightest move.
What any other country might be tempted to do with all this unplayable debt is to default on it. This is the equivalent of a person or business being declared bankrupt. Greece has been talked of defaulting for years and indeed to the IMF, it did so just a few weeks ago though this would be nothing compared to defaulting to the European Central Bank.
What does defaulting mean? Well the country holds up it hands and admits it is broke and no-one is going to get their money whether they like it or not. Alternatively creditors, in this case usually nations, agree that they will only get a tenth or quarter of funds owned. The headlines would have you believe that defaulting would be the end of the world for Greece (it is just one of a number of admittedly difficult choices facing the country) however it is not the end of the world and actually countries default all the time. Very few have never defaulted on their debt though almost all are indebted and there is much to be said for a world-wide cancellation of debt and releasing ourselves of this theoretical financial misery.
Sadly for Greece,it has spent almost half of its modern existence this last 180 years defaulting on its payments or being in otherwise very serious financial problems. Spain however beats Greece’s six times with a record 13 modern defaults. Russia defaulted in the 1990’s and most of Europe has done so since France defaulted in 1812. In fact one of the worst and biggest offenders is Germany. It defaulted three times in the 20th century alone and received debt cancellation from dozens of nations, including Greece. Most of Europe was bankrupt after WW2 and enjoyed generous aid from the United States in the form of the Marshall Plan of which Germany came out of it very well.
In Europe, only the U.K. has technically never defaulted which is an impressive record over such a long history but thats financial prudence and stability for you. The U.K. only completed its WW2 debt to the United States in 2006, ironic after the German default 40 years earlier. In fact we’re still paying off WW1 debts so it isn’t just Greece who might have to have a century of financial hardship but this reliability and belief in honouring debts does in some ways pay off if you’ll excuse the pun.
The closest the U.K. came to defaulting on its debt was in the early 1930’s when it “agreed” terms with the United States regarding debts from WW1. In fact the U.K didn’t have real debts itself, but had given France money and France had given money to Germany.
The U.S.A has also never technically defaulted though some individual states have and instead has used financial policies to avoid defaulting… exactly what Greece should have done but was unable to do so several years ago.
This history also goes against Greece what happens as they will always be charged higher interest as there can be no real guarantee that future debt will ever be repaid and this just makes things tougher for Greeks whilst nations like the U.K. or U.S.A will always get good deals as the government will never renege on debts even from world wars whereas in Africa a quick coup or in Argentina a few riots means the country seems ready to default.
China and Japan have both defaulted several times on their debt and most countries in Africa have done many, many times. It is hard to find countries in South and Central America that have never defaulted, in fact I’d take a quick guess and say no Spanish or Portuguese speaking nation there has never defaulted (I could be wrong). Argentina is currently defaulting its way through life having agreed a way forward with debtors having been terribly and incompetently run by a series of governments.
If a country defaults, invariably there will be lots of complaints, for a few years it might be a financial pariah and some nations may later insist on compensation before investing with them again but sooner or later the very fact that there is profit to be made is generally too much to stop countries and organisations forgetting the past for long.
The days have probably gone when countries invaded those who owed it money as France did to Mexico and Britain did to Egypt in the 19th century.
In fact there is one other option that has been muted for Greece and in the end is surely the only possible end-goal for the whole Euro project and that is for it and other countries to be politically run from a central location as well as economically run. In effect this is what happened to Scotland, whilst it might be assumed that at some point England conquered Scotland in a war in reality Scotland attempted to imitate England with regards to creating overseas colonies. Unfortunately for Scotland, it didn’t work out very well and it all went very wrong leaving Scotland bankrupt and unable to pay its debts. As already friendly though theoretically different and competing nations, the culture was close enough for England to offer to pay off the Scottish debts in return to the Scottish parliament joining England in the Act of Union.
Whatever happens to Greece and to the Euro isn’t going to be pretty and not many today would claim the Euro to be anything other but a disaster. The refusal of the U.K. 15 odd years ago not to give up the Pound has never looked a better idea and whilst the ideals of a pan-European super-state may appeal to tiny and relatively weak nations like Latvia or Slovenia on a certain level, everything seems to be a me-me-me approach rather than genuinely helping other states as for much of the time the richer nations of Germany, Netherlands, Britain and a few others did (with the prospect of stability and larger “internal market” in return).
It also seems that increasingly, the peoples of Europe themselves might rather fancy going for a British style than a German one. The problem for them is that the governments in Berlin and Paris don’t seem to want to give them a choice which goes against the very ideas that started things off after WW2 and no-one wants to go there.