Here at AMERICAblog we have higher than the average number of Greek Americans per blog. Though my last name doesn't show it, I am a proud descendant of a Greek restaurant owner in New York Cty. That means I pay somewhat more attention to the Greek economic mess than I might otherwise, and have at least as compassionate a view as you are likely to find among professional economists. Having said that, I think the Greek situation is a disaster, certainly for them and possibly for the Euro zone in general. The previous Greek governments did indeed play fast and loose with accounting, and Greece is indeed way too overburdened with unnecessary public sector workers.
But all that is no excuse to plunge the country into an economic disaster if it isn't necessary, or at least if it can be lessened somewhat. No question about it, the Greeks will have to undergo some austerity for a while, and if they are EVER going to pay off their mounting external debt they will need to export more and import less. Given prices and wages that are too high to be competitive with the rest of Europe, they have two options:
1. Leave the euro and devalue vis-a-vis the rest of Europe. This would, at a stroke, lower all the relative prices but at the cost of massive bank instability and credit contraction.
2. Stay in the euro zone, but force every price and wage in the economy to drop the necessary amount (maybe 25% just to guess at a number). This could work, but at the price of a massive depression and very possibly enough "civil unrest" to cause a government overthrow.
Either of these options would be very very unpleasant for Greece, but could well leave the rest of the Euro zone intact, if not the picture of economic stability and health. But what if other Euro zone countries got in to similar trouble? What then?
Once the unthinkable has happened it becomes much easier to think it could happen in more than one place - and Spain is likely to be a major firewall for the EU, since it is possible (though painful) to amputate smaller peripheral countries like Greece or Portugal, but much harder when we start talking about large countries more essential to the core of the union like Spain.
That there are problems at all in Spain helps to show that Greece's problems aren't all a result of spendthrift politicians, as the deficit scolds here would have you believe. Spain did everything it was supposed to - it had a sensible fiscal policy which resulted in surpluses and pretty much toed the line on everything the EU wanted it to. But Spain had a building boom much like Florida did in the USA - a massive influx of investment that built endless rows of condos on the Costa del Sol, and employed thousands of construction workers, pushing up wages and prices beyond neighbors in the EU. There, as in Florida, the bubble eventually popped.
Well OK you might say, Florida has a single currency with the rest of the US just like Spain does with the rest of Europe, so what is the problem? Well, for starters, all those unemployed Floridians can go look for work in Texas or New York or anywhere else in the USA without any problem at all, and many have done just that. It is much harder for a Spaniard to up stakes and move to France or Germany even if they are technically allowed to do so. Why? Among other reasons, many Spanish workers don't speak French or German, whereas the Floridian, the Texan and the New Yorker share a common tongue.
Equally important, as soon as Florida started hitting the skids, there were automatic fiscal transfers to Florida that kicked in without any debate or delay - unemployment checks were sent out, food stamps were issued, and because unemployment was so high, fewer taxes were collected. All of this amounted to an automatic transfer from relatively better off states to hard hit states like Florida.
No such transfers can happen in Europe - with the Germans balking at even their share of a Greek bailout, it is hard to imagine them doing more than a drop in the bucket of what Spain might need, should it come to that.
So what will happen? It is pretty much inevitable that there will be a period of fiscal austerity for all of the EU - and the credit contraction that is already happening because of the events of the past two years will get even tighter. Should Greece be followed by other countries into default, then we can expect the mother of all credit contractions to follow. And THAT should scare the crap out of all of us - the bank failures of the Great Depression started in Austria and spread worldwide. Nobody will be immune, including the USA, and especially including our nascent recovery.
There. I have it off my chest. That's my nightmare scenario.
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