Friday, May 13, 2011

The World Has More to Learn from Greece


The print media and the internet media continue to write about the problems of Greece, and people in the U. S. continue to wonder why we care. 

Well first of all, Greece is a wonderful country.  It has made great contributions to modern civilization.  Its people are warm friendly and the country itself is a great place to visit.  Greek food and Greek culture are a prominent part of U. S. ethnic  society.

Greece is also a current experiment.  The Greek fiscal sector has been so mismanaged that it has required a bailout from the European Community and the IMF.  The experiment part is that those providing the bailout required, amongst other things, that the Greek pursue austerity.  Professional economists knew that this would lead to recession, high unemployment, lower tax revenues and all of the other problems that a contraction in the economy brings. As a result, the policy imposed on Greece by its lenders was going to result in Greece being unable to pay its lenders.  This is now occurring.

That Greece will default on its debts is no open to question. That the reason for this is in large part due to fiscal policy imposed on Greece and is smaller part due to the failure of the Greek government to reform the economy is not open to question. The only question is how the default will take place. 

There are basically two ways this will happen.

  1. The maturities of existing debt will be extended, thus furthering the illusion that some time in the future Greece’s economy will recover to the extent that at some future time Greece can go to the debt markets, borrow new money and pay back the old debts.
  2. The European community will step in and lend Greece the money to pay maturing debts,  This will substitute European government owned debt for debt currently owned by the private sector.  Greece will become a wholly owned subsidiary of the strong European economies.

There is a third scenario, the nightmare one.  In this scenario the European community is unable to come to the rescue of Greece, the country does a traditional default, and the European monetary system moves into chaos.  The Euro falls to a very low level, and Europe is plunged back into recession.  This scenario is not discussed because it would frighten small children.

Why does this matter?  Because in the U. S. we are seeing the Conservative Republican party moving to force fiscal contraction on the U. S. economy.  They believe that this will result in expanding growth and income and employment.  They need to take a look at the Greek experiment.

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