We seem to hear it every day. It’s on the news. The impact to the global economy could be immense. The fall of the Euro Currency and the Euro Zone could begin. The ripple effect will bring us into a global recession. All this stemming from the birth place of democracy, Greece. Somehow I don’t think Aristotle saw this coming. How does a global economy evolve so that Greece holds the fate of economic recovery or economic disaster in it’s seemingly feeble hands? More than anything it is evidence on how connected we are as a global economy. It just takes one domino to fall to set in motion a chain of events. It’s an interesting phenom but somehow the domino example simplifies what is a rather complex topic, but one I would like to try to tackle. Hopefully it will make some sense in the end.
In college I studied in Copenhagen for a year in 1987 (prior to the fall of the Berlin Wall). A primary focus was, the then 30 plus year old union, the European Economic Community. The big transition being discussed at the time was not the move to a common currency, the Euro, but the move to border less states. At the time you still required a passport to travel from Denmark to Germany. It was a point of pride for my fellow students to have a passport with a bunch of stamps representing all the countries they had visited. All the students in the program had the travel bug. Later in the school year we went to the European Union headquarters in Brussels, Belgium to see, hear and learn how this community worked. We visited the different branches of EU government, US trade representatives and enjoyed Belgian beer. It was an exciting time in Europe as they were moving forward with great plans of an integrated Europe. There were obstacles. Certain countries were economically well behind others, this included countries such as Ireland, Portugal and Greece. While other stronger members, primarily Germany paid the bills to modernize these struggling countries. Looming in the distance was the idea of a common European currency. The idea of saying good-bye to Italian Lira’s and Greek drachma’s
Stepping back a bit further Europe as a whole has always had different views on social services. In part driven by the culture, in part driven by the different relationships between labor unions and the state and private industry. There are, like any system, both good and bad things. There are basics like health care. In Europe it is covered by the state (through higher taxes), but specialty services like a back surgery you may need may take a long time to get scheduled. But talk to anyone in the United States who is out of work and the biggest concern is health care. Another big one is retirement. In France for example some public workers can retire in their fifties. With people living longer and needing more care in their old age, this has become problematic. not to mention very costly. There are a lot of other services provided by many European Union members but bringing this back to current events when the economy dives it impacts these social services.
Since the fall of Lehman-Brothers we have seen the global economy dive, and it is worth to note I say global economy. We are interconnected. The effort to create a common currency in Europe was well founded as the world looked only to, and still only looks to the US dollar for safe haven. This has been a savior for the US as foreign countries buy up US treasuries and float our debt. The euro for a while looked like it would act as an alternative to the dollar. And for a while it was. The challenge in Europe is it is often called the United States of Europe, but in really these are still independent sovereign states. Though they for the most part have a common currency (Denmark and the United Kingdom have yet to move to the Euro), in term of funding social services each country still has to fiance these services on their own. This means that each country has to finance these services through the issuance of government debts. In the end you have Greek Bonds, Italian bonds, Spanish bonds etc.. With 27 countries in the European Union how do you proactively manage each countries finances? This is unlike the states in the US that have to balance their budgets each year, which is why a lot of the big cost cutting we see on a daily basis is happening at the states and down through counties and cities. Imagine if you will 50 states, in addition to the federal deficit, all running multi-billion dollar deficits. Now imagine Europe..except your not imagining.
When the economy tanked the math becomes pretty simple. If your tax revenues fall below what your services cost you start to run a deficit and the lager the deficit grows, the more it costs to finance as the banks who loan the money expect higher returns, in the form of higher interest rates. At some point the interest rates get to a point where the country cannot make payments. In the case of Europe the magic number seems to be 7% interest. So what does Greece have to do? They have to cut government or what is being called austerity measures. This means social services that have been available for years have to be re-examined and cut. It could be health care costs are slashed. Retirement ages are raised. Pension payments are cuts. Unions rights are challenged. Education cuts. It all sounds very familiar to what we hear about on the news on a daily basis in the United States. Except in this case it is very real. However as we have seen on television this leads to civil unrest.
One scenario has that Greece declares bankruptcy and exits the Euro and goes back to the drachma. That means anyone in Greece owing money in Euros will see there costs dramatically rise as the relationship between the drachma and Euro is one where we will likely see the drachma slide and thus end up costing debt holders even more money. This will likely also lead towards sky rocketing inflation in Greece, All in all this scenario would be bad for Greeks and the Greek economy. It would also cause instability in the Euro as you would then have the who’s next scenario, which right now is Italy, an even bigger problem looming, that is no longer on the horizon. If the euro starts to falter it will be good for no one. As we are hearing this eventually starts to impact economies beyond the shores of Europe. We have already seen some Wall Street firms make bad bets on Greek debt, leading to more layoffs.
It’s hard to believe that the birth place of democracy has become such a focal point of global economics and politics. What would Aristotle or Socrates do? Of course much of their dialog was about the conflicts of man himself. this material thing called the economy might not interest them a whole lot. But it is of interest to the people who make up the economy, who are already on edge from three years of economic unrest. Frankly we are all tired of the instability in an increasingly connected and unstable world. It’s still hard for most to grasp how Greece holds our fate. I have tried, but does this comfort someone who is unemployed in Topeka? Maybe it is best to leave this to Socrates:
“True wisdom comes to each of us when we realize how little we understand about life, ourselves, and the world around us.”
Good Night and Good Luck
Hans Henrik Hoffmann November 15th 2011