I am writing this on a Greek island, looking out at 10 other islands and the blue Aegean Sea. A cruise ship that often docks at Port Everglades is passing by, headed for Mykonos, eight miles to the east. The scene couldn’t be more beautiful. It also couldn’t be more deceiving. Greece, and with it its European neighbors and indeed the entire world’s financial system, are in trouble, mostly of their own making. Governments in the outer rim of the Eurozone (the 17 countries using the common European currency), have lived beyond their means for the last decade, and the bill is now coming due. The rating agencies, which formerly rated their bonds AAA just like they did the mortgages of unqualified homeowners right here in the U.S.A., are belatedly changing their ratings to junk. The bankers in Germany, France, and the other core European countries who lent recklessly to these countries are trying to salvage what they can and looking to their own governments for help. Even investors in the U.S. who hold debt issued by these European banks could be in trouble if Greece, Portugal, Ireland, Spain and/or Italy default and drag the banks down. At its very worst, a default by Greece or any of the others could cause a contagion that might require still another bank bailout, this time on a global scale. Keep in mind that the events that preceded the Stock Market Crash of 1929 started with the default of a small, obscure bank in Vienna, Austria. And the world’s financial system was nowhere near as interlinked back then as it is today.
Archive for the ‘World Economy’ Category
The View from the Eye of the Storm – Part III
In the two previous segments of this series, we looked at the causes of the Greek debt crisis, the joint European Union (EU) and International Monetary Fund (IMF) bailout, and the measures the present Greek government has been forced to undertake to dig the country out of the mess it inherited when it took office less than a year ago. In this final segment, we will look at what lies ahead for Greece, and the perils, challenges, and even opportunities that could develop from the present crisis. We will look at the effect of these events on the European economy and at what impact, if any, they may have on the world economy and that of the United States. Finally, as in the previous two segments, we will see whether there are lessons to be learned from the situation in Greece, and in Europe in general, which may possibly apply as well to us in the United States.
As I wrote in previous posts, the Greek government has already picked the low-hanging fruit in its attempt to dig the country out of the crisis and fulfill the conditions set by its creditors. Government spending has been slashed, taxes raised, pensions and public sector salaries cut, and a fierce assault launched on the national sport of tax evasion. However, the country’s biggest problem in the long run is the inefficiency of its economy, which increases costs and reduces competitiveness vis-à-vis its European partners. Things cost more in Greece than in Germany or France because monopolies and oligopolies are tolerated and because antiquated protectionist laws remain on the books despite pressure from the EU to repeal them. In fact, Greece has been paying fines to the EU for years rather than confront the strong lobbies of the special interests which want to retain their privileges. And therein lies the government’s biggest challenge, the biggest risk to the country’s recovery and, ultimately, its biggest opportunity. Because if these special interest privileges are revoked, Greece will end up with a more open and more competitive economy and a friendlier climate for investment and economic growth. (more…)
The View From the Eye of the Storm – Part II
By Professor Pan Yatrakis, NOVA Southeastern Professor of Economics
In my last post a month ago, I outlined the events that created the Greek debt crisis and their lessons for the United States. During the month since that post, there have been a number of economic developments in Greece and the rest of Europe, most of them positive. The ruling Greek Socialist Party, though by razor-thin margins and with much grumbling in the ranks, nevertheless passed watershed legislation which put Greece’s Social Security system on a path to fiscal solvency. Although retirees’ checks will now average somewhat less than in the United States, they will still provide about two-thirds of their pre-retirement income. And Greeks will still be able to retire at age 65 with full benefits, two years earlier than Americans. The catch is that, in order to get those full benefits, they will have to have worked for at least 40 years, up from 35 at present, with tight allowances for military service, childbearing and periods of involuntary unemployment. (more…)
The View from the Eye of the Storm
Pan Yatrakis is a professor of Finance and Economics at NOVA Southeastern University.
Greetings from the eye of the storm. I am in Greece for the summer, and in my next two blog entries I will try to explain in layperson’s terms how the Greek financial crisis came about, where things stand now, what lies ahead for Greece and Europe, and why what happens in Greece matters to us in the United States. In this first installment, we’ll look at how the crisis developed and where the situation now stands.
The Greek government got into trouble for the same reason as someone who starts out with a reasonably good credit score and then takes out a lot of credit cards and maxes them out. At some point, the lenders catch on to the fact that there is now a risk that the borrower may not be able to keep up payments, and they raise their interest rate to make up for their increased risk. This, in turn, makes servicing the debt even harder for the borrower and increases the chances of default. That’s exactly what happened here; the trigger that finally woke up Greece’s creditors was the disclosure by the government that the previous administration had lied about the country’s finances, and that the budget deficit was really 13.6% instead of 4.6% of Gross Domestic Product (GDP), as previously reported. (more…)
