Good morning Hank, it's Tuesday.
I'm just back from a crazy and beautiful and
exhausting trip to Brazil in support of Cidades
de Papel, and I will talk more about that
later, but for now, I want to talk about Greece.
So Hank, as you know, I was the third best
economist among all C students at the Alabama
state academic decathlon in 1994, but even
a professional like myself does not know how
the economic crisis in Greece should or will
end.
So I'm not gonna try to offer solutions today;
I'm just gonna try to understand the problem
and how we came to a place so desperate that
the news media has created the horrific compound
word "Grexit."
So Greece is a country in southern Europe:
you know, the Acropolis, Socrates, Hipacea,
the movie "300," et cetera, and until 2001,
its currency was the drachma, which probably
meant "handful," because three thousand years
ago, a "drachma" was a handful of six metal
sticks that were used as currency.
Flash forward a bit to 1832: Greece becomes
an independent nation and brings back the
drachma.
But then, in 2001, Greece joined the Eurozone,
along with all of these countries, and began
using the Euro as its currency.
The euro has been great, insofar as it facilitates
trade, but nineteen countries sharing a currency
has its problems.
Like one of the reasons this crisis has been
so confounding is that Greece's monetary policy
- how much money they can print - is controlled
by the European Central Bank, but Greece's
fiscal policy - how much money they can spend
and where they spend it - is mostly controlled
by the Greek government.
Now, Greece and other Eurozone countries are
supposed to follow some basic fiscal rules
like no more than three percent annual budget
deficits, for instance, but many Eurozone
countries, including Greece, have broken those
rules.
Speaking of which, since the mid 1990s, the
Greek government had been reporting deficits
and debts that were much lower than the actual
deficits and debts.
And then every time a new government got elected,
they would be like "wow, the previous government
was not telling the whole truth about deficits",
and then that new government would proceed
to not tell the whole truth about deficits.
And then in 2009, a newly elected government
announced that the budget deficit that year
would be 13.9% of total economic output
and that the numbers had been fudged for some
previous years.
How did it get so bad?
Well, that depends on who you ask.
Some people point out that Greece's labor
costs got much higher after joining the Eurozone.
They probably had too much debt to start,
there was a huge problem with tax evasion
in Greece, and when the 2008 US recession
became global, Greece was disproportionately
affected because two of its biggest industries
are shipping and tourism, neither of which
fare particularly well in recessions.
Now, I wanna emphasize that it's not always
bad for a government to run a deficit, if
that deficit can be invested in ways that
grow the economy and increase the tax base,
it will increase government revenue, it's
a virtuous cycle.
For instance, the United States has a strong
economy, and we've been running a deficit
quite consistently for fifty years.
But Greece's situation is different.
They've been able to borrow money at low interest
rates ever since joining the euro, because
people figured they were a safe bet, right?
The euro is safe.
But with these revelations in 2009 that Greece's
deficits were so high, investors started to
get nervous, and they started to ask for higher
and higher interest rates in exchange for
loans.
Greece needed that money so it had to accept
the higher interest rates, which made its
deficit problem worse, which made the interest
rates go up--that's a vicious cycle.
Okay Hank, so by the spring of 2010, the problem
had become so bad that a younger and more
promising version of myself discussed it in
a Vlogbrothers video.
Also it was so bad that the European Commission
and the International Monetary Fund came to
Greece's aid with a 110 billion euro bailout.
The European Central Bank also helped out
by buying some Greek debt, and giving Greek
banks access to capital, and these three institutions
came to be known as "the troika".
Now this all may seem very generous of Europe
and the IMF, but one, it was a loan, not a
gift, and two, back then the Eurozone was
feeling contagion jitters.
Interest rates were also starting to creep
up in Portugal and Ireland and Spain.
And there was a real fear that the whole Eurozone
might fall apart and that would be disastrous
for trade and would also lead to a big worldwide
recession.
Furthermore, most of Greece's debt was owed
to German and French banks.
So in a way, the governments of the biggest
countries in the Eurozone were lending money
to Greece so that Greece could pay back the
banks of the biggest countries in the Eurozone.
So in exchange for these loans, Greece agreed
to austerity measures - basically they raised
taxes and cut pensions and other benefits.
And this kind of worked insofar as Greece
did decrease their budget deficit from 25
billion euro in 2009 to just 5.2 billion euro
in 2011.
But it also caused the Greek economy to contract
dramatically.
People had less money to spend as their pensions
shrank and their taxes rose, and that in turn
led to the failure of businesses and fewer
jobs.
And as the economy shrank, so did tax revenues,
because the economy is the thing that governments
tax, and in the end, nothing really got better.
Greece still didn't have a sustainable economy,
so in 2012, the troika loaned them another
130 billion euro.
And then over the last couple years there
were some real signs of life in the Greek
economy, and it looked like things were starting
to bottom out.
But unemployment is still over 25 percent,
and I wanna emphasize that economic crises
are also humanitarian crises.
30 percent of people in Greece now live in
poverty, and almost one in five doesn't have
enough money to buy food that will meet their
daily nutritional needs.
The Greek depression has been as deep as the
United States' Great Depression.
And it may not be over.
But from a wider European economic perspective,
things have gotten a lot better in the last
five years.
Private European banks own much less Greek
debt than they did in 2010, the economies
of Ireland and Portugal are much healthier,
and so it's much less likely that the Greek
economy collapsing, or even Greece exiting
the euro, would be catastrophic for the rest
of Europe.
Okay so flash forward to the end of last year,
a new leftist government is elected in Greece,
and they say "no more austerity, we can't
take it anymore."
Their argument, and many economists would
agree with this, is that austerity will never
work because the economy just keeps shrinking
and shrinking and shrinking at least as fast
as the deficit does.
In response to this, the troika stopped sending
loan payments, and then there were a bunch
of negotiations, and then the Greek government
put it to a referendum: "Should we continue
with austerity, so that we can get this loan
money, or should we just say no?"
And then on July 5th, the Greek people voted
overwhelmingly to say, "no."
Now technically this was a symbolic vote,
because the troika had pulled their offer
of the table on June 30th.
But yeah, that's how we got to where we are.
Now without these payments coming into Greece,
there is suddenly a very serious liquidity
crisis in Greek banks.
Basically Greek banks may have only 500 million
euro left, which is like 45 euro per person
in Greece.
Many ATMs are out of cash, others can only
dispense 10 euro notes because they're out
of 20s.
And if this continues, Greece will be forced
to print some form of alternate currency to
make payments to retirees and government employees.
And that would be the so-called "Grexit,"
a Greek exit from the Eurozone.
And nobody knows quite what would happen then,
I mean what the economic implications would
be, but also the political and legal ones.
Now Hank, normally in a situation like this
- 25 percent unemployment, shrinking economy,
liquidity crisis - Greece would just print
more money.
But they can't, because they're part of the
Eurozone, and as previously noted, the European
Central Bank decides how much money to print.
And that gets to the root of the problem.
The Eurozone wants to be a transnational currency,
but each country inside of it answers to their
own citizens.
Germany doesn't wanna print more money, it
would be bad for the German economy, and they're
not keen on sending more money to Greece;
from their perspective, it's not their fault
that Greece can't pay their debts.
But from a Greek perspective, it's hard to
see how that country has benefited from these
so-called "bailouts."
Many Greeks feel that the troika's bailouts
really only bought time for other European
nations and their banks to distance themselves
from Greece's financial problems.
Hank, this inability to decide just how unified
they should be is the real existential problem
of the Eurozone.
Obviously, Hank, there's a lot of blame to
go around here.
But in the end, if you can't listen to the
narratives of others, if you can't construct
an idea of the Eurozone in which all members
are members of some "us," then you can't expect
to share a continent effectively, let alone
a currency.
Hank, I'll see you on Friday.
