Why is Greece poised to kill the global economy?

Posted Wednesday, September 28, 2011 in Analysis

Why is Greece poised to kill the global economy?

Greek workers march to protest severe austerity measures.

by Gina Hamilton

Okay, you've been watching your 401Ks tank in the last couple of weeks, except for the last two days, and the Pundits are intoning about how Greece is about to default and how that will do in the European economy, possibly killing the euro itself, and that will have repercussions for the global economy, as well.

But why should one little Mediterranean country, which has never been a major trading partner for anybody, and anyway has seemingly always been on the verge of bankruptcy, have the power to cause a second great recession?

First, Greece's debt is pretty high for a little country its size - about $500 billion.  But that's not the worst of it.  First, a little background on the euro, Greece's (and other Mediterranean nations') creditworthiness, and how we got to this point.

The euro was introduced in 1999, and as the less-able economies (Greece, Portugal, Spain, and Ireland, and others too) were suddenly the darlings of the investment world.  Apparently, because they adopted the euro, investors thought that their creditworthiness was as sound as Germany's, or France's.  These investors were sort of wrong, but they may end up being on the winning side after all, because Germany and France and the low countries have an incredibly vested interest in not letting other eurozone nations default.

During the years of high lending, some countries did better than others.  Spain and Ireland actually ran surpluses during those years, and kept low public debt, while other countries - Greece, Portugal, Italy - were fairly profligate spenders.   But in general, the funding fueled housing and other booms, often with private spending.  Not long ago, Ireland was held up as a model for excellence in economic matters.  Many U.S. businesses were actually relocating to Ireland.

Things went sour fairly quickly.

The boom ended abruptly, and fiscal crisis followed.  In nation after nation, recessions drove down tax income, which led to lopsided budgets in countries that were formerly in pretty good shape.  The cost of the bank bailouts led to a huge increase in each country's national debt; and this led to a loss of confidence by the investors.  They stopped buying bonds, virtually overnight.

The rest of the eurozone demanded austerity, which served only to hurt people least able to handle it.  In return, they offered some stopgap financing to the troubled nations.

It won't work for Greece, and probably not for Ireland or Portugal, either.  Spain might be able to squeek through without a default,

But as it is becoming clearer that Greece, at the very least, is going to default on at least part of its debt, Germany has finally realized that its own economy is in danger -- they share a currency, after all.  Forcing Greece to take on more extreme austerity measures -- a national property tax in a country that has never experienced such a thing before -- is creating great unrest in Greek citizens, and will still not be enough to deal with its debt crisis.  But Angela Merkel, the German chancellor, is extending the hand of fiscal friendship to stave off an economic collapse of the euro. 

By Germany's soft approach in the last couple of days, world markets took a deep breath, and they've been up the last couple of days.

But there is no way that Germany and the rest of the eurozone can reduce enough of Greece's public debt to save it from default, even if the Greeks were willing to submit themselves to the punishing austerity measures that have been prescribed for them, which they clearly are not. 

If Germany et al can't pull it off, the euro will collapse, and anyone who has invested in or trades with the eurozone -- Europe is the U.S. best trading partner -- will be ruined.  A eurozone collapse will plunge the entire global economy back into a severe recession, if not a depression.

That's why the markets have been behaving badly lately, and likely will see-saw for the next few years, until either Greece and the other peripheral economies fail or until austerity measures actually work, which isn't likely.

For the U.S., rethinking extreme globalism might be a good thing. 

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