Thursday, May 20, 2010

Greece and the Euro

Some or many of you may have heard about the problems the European Union and Greece are facing. Here is my attempt to briefly summarize it to non-economic students:

Greece is facing an economic crisis because it defaulted on its debt run up by large deficit spending in recent years. The financial crisis in the United States exacerbated the situation and now Greece is unable to pay its 300+ billion Euro debt. The International Monetary Fund and the European Union have agreed on a bailout package that would pay Greece 110 billion Euros over three years if they achieve and maintain fiscal austerity. In other words, if Greece stops spending more than it brings in, the EU and the IMF will help them pay their debt.

Much of the help is coming from the German treasury who has one of the strongest economies in the EU. German bankers also hold a large portion of Greece's debt, so the help from the EU and the IMF is essentially a bailout of the German banks and all the banks holding Greece's debt just as the U.S. "TARP" was a bailout of US banks.

So what are the results of this bailout? For one, the bailout is meant to prevent another crisis or worse, a chain of crises that would start in the other EU nations of Ireland, Portugal, Italy, and Spain who are also in debt trouble. This chain of crises could likely result in the dissolving of the European Union because of a lack of confidence in the Euro and "destroyed" European economies. However, this result seems unlikely because of the commitment to the monetary union and the passage of the bailout plan.

Another problem is the painful process of fiscal austerity. This is often one of the conditions to receive monetary help from the IMF but is one that will result is years of contraction and high unemployment for the people of Greece. The middle and lower classes of Greece will be hit the hardest because they will experience the greatest levels of unemployment, they will see increases in taxes, and less government spending on programs (healthcare, unemployment insurance, etc.) designed to help them.

Greece's options are limited because it gave up its monetary independence by joining the European Union. All of the nations within the EU who adopted the Euro as its currency gave up their ability to do what the US's Federal Reserve did in 2008 to prevent an even greater crisis (provide funding to banks and lower key interest rates to prevent further fallout in the financial sector).

The people of Greece have some tough years ahead of them and the Euro may face a drop in value which could hurt US exports to Europe and thus the overall US economy, but the bailout likely saved a disbanding of the EU experiment.

It is important in tough economic times to remember where our true happiness lies and to rely on each other for material support when it is needed. Don't let failing economies, heated political debates, or bailouts of the "bad guys" get you down. It is better to respond with love for neighbor including political enemies. The only "fixes" to these problems are virtuous people who act for each other and not simply for oneself. This is a big chore, but one that can be done with hope, prayer, and love. If we take up the task as individuals, our politicians will follow suit and good policies will be made as a result.

For further reading about Greece and the Euro:
Greece's economic woes
Euro-Bankers to Greece: The Wealthy Won’t Pay their Taxes, So Labor Must Do So
Repeat After Me: The USA Does NOT Have a ‘Greece Problem’

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