Let’s say you’ve been living under a rock for the past few weeks. Not a fair assumption, but it’s the closest analogy we’ve got. If you’ve turned on the news (or phone, tablet, or computer for that matter) you may have heard about something going down in Greece. More specifically, you may have heard about how her economy is in shambles, the possibility of a Grecian exit from the Eurozone, and increasing tension between Greece and Germany, the EU’s financial powerhouse.
Summer is in full swing, and I’m willing to be most of you are spending free time grilling with friends or entertaining guests by the pool (What, you aren’t? What’s wrong with you?). The last thing you want though, is for talk about Greece to arise while you’re all but clueless on the increasingly complicated situation in a monstrously messy Mediterranean.
When Did It Start?
In the paper “The Greek Debt Crisis: Origins and Implications”, Athens University of Economics and Business professor Georgios P. Kouretas takes us back to the beginning of the whole affair. The roots run deep, but for simplicity, lets wind the clock back to 1994. It was then that the Greek Government announced the intention to bring the nation into the Eurozone. But in order to do this by the target year, 2001, the nation had to meet the Maastricht Criteria.
The Maastricht What?
The Maastricht Criteria. You may have seen it referred to more formally as the Euro Convergence Criteria. Think of them as the rules a country must meet in order to enter the Eurozone. No need to cover it all, but one important measure was the reduction of the government’s annual general deficit to at or under 3%. When the Greek Government made clear it would work to meet these goals, interest rates on government bonds plummeted from 20% to 3.5%. In other words, it became a whole lot cheaper for the government to borrow money.
But Those Low Rates Are Good, Right?
On paper, nothing. Good for you Greece! When Greece adopted the Euro, it it lent its economic policy some much needed credibility and helped reduce inflation. The falling interest rates also facilitated an increase in real estate and business investment, as well as good ol’ consumption spending. But most importantly, a reduction in nominal interest rates means that servicing the public debt is cheaper. If you were in charge of a country saddled with high public debt and falling interest rates, what would you do? Take advantage of the low rates and pay off some of the debt! No brainer.
The problem is, Greece didn’t do that. From 2001-09 they ran an annual fiscal deficit of 6% of the GDP– double the Maastricht Criteria limit of 3%. They serviced little of their existing debt, and when the financial crisis of 2007 hit, they were in big trouble. To sum it up, the fatal mistake was that Greece believed that the low interest rates were permanent. The government was fooled by the markets, and thought these rates were another benefit of adopting the Euro.
But isn’t a Euro a Euro?
Not so fast. Yes, it looks the same everywhere, and yes you can use the currency over international borders. But it doesn’t behave the same everywhere. Think about the US Dollar. A dollar in Wisconsin is just as good as a dollar in Florida. Though state economies may differ, the dollar answers to the same bank and is used in the same social programs. Mississippi may be a poor state, but it’s welfare programs can be funded by the power of the almighty US Dollar. At the end of the day, it’s still America, and the poorer states aren’t left alone to fend for themselves.
Not so in Europe. A floundering sovereign state there (Greece) is not going to get any help from a wealthier nation (Germany). There is no centralized government, just a collection of sovereign nations who agree to use the same currency. Check out this video from Vox for a great illustration on this idea:
Do I Fully Understand Sunday’s Vote? όχι!
After the economy began to tank, no one would lend them money. No one. Compare this to the US and UK, who could keep receiving loans during their own recessions. Because Greece couldn’t run any higher deficits, they were forced to impose harsh austerity measures. And they’re exactly what they sound like. The Greek government had to cut spending, from item after item, and it was not easy on Her citizens. But in January, Prime Minister Alexis Tsipras entered office and his far-left Syriza Party rose to power. Their platform? The end of austerity.
On Sunday, Greece held a vote to decide if the government would submit to bailout terms set by the European Commission, the International Monetary Fund, and the European Central Bank (collectively known as the ‘Troika’). The terms are covered in dozens of pages, but what’s the overarching theme? You guessed it– more austerity measures. Fed up with these policies, the Greek people overwhelmingly voted no– όχι– effectively rejecting the terms and leaving the nation in a peculiar situation. By the way, the nation owed a payment to the IMF the following day, which, as expected, was missed.
Adams, Telegraph pic.twitter.com/dW1tlSNNGo
— John Rentoul (@JohnRentoul) July 6, 2015
Where Do They Go From Here?
The “no” vote, in all likelihood, signals the beginning of the end for Greece’s place in the Eurozone. Since no one besides the Troika will even think about lending to Greece, they need to find a way to deal with the debt on their own. According to Vox, the Greek Government could take care of domestic payments with IOUs. The problem is that they would be pretty much worthless outside of Greece, and even if the government declares them equal to the Euro, the markets will probably not agree. An alternative option? Default on debt. But that would be another devastating blow to the economy.
In any other situation, Greece would just print more money. But it can’t, because it uses the Euro. In order to pull this off, they would have to leave the Eurozone and go back to the old national currency– the drachma. The problem here, is that most contracts in Greece are tied to the Euro, so transferring it all to the drachma would involve an all-new slew of legal headaches.
Simply put, this is an historic moment for Greece and the rest of the European Union. But here’s to hoping this guide helped, and that the situation is no longer all Greek to you.