More out there today on the possibility of Greece leaving the Eurozone. The New York Times is a bit less pessimistic than the Washington Post, but if you're looking for something new to get nervous about, here you go. Better yet, I'll summarize: we don't know the outcome, but it will be ugly. Of course, it's already ugly, and that's worth remembering.
In terms of global reverberations, investors from other countries have been pulling out of Greece for a while. Claims by foreign banks in Greece are now down to below $100 billion, compared to $600-700 billion in Spain and Italy. From the Washington Post:
Of the country's $430 billion in outstanding public debt, well over half is owed to the International Monetary Fund, the European Central Bank and other European institutions. The original worry -- that French and German banks might fail because of large holdings of Greek bonds that might not be repaid -- has been largely erased. Over the past two years those bonds have been sold or the losses on them absorbed when the debt write-down occurred this year.
History also has favorable lessons of countries that decoupled from a currency peg and did a lot better than everyone expected, with Argentina the most recent example. After a period of indebtedness and IMF imposed austerity, they broke their dollar peg in 2002 and defaulted on their debt. Their economy suffered deeply for about a year, but the upside was they could now devalue their currency. That helped to set off a solid growth phase, as the Argentine economy grew over 8% per year over the next six years, employing human and physical capital that had been sitting idle during the austerity years. Sound familiar?
But the risks here are great and, of course, go well beyond Greece. If global capital decides that bigger, more connected countries like Spain and Italy are next to leave the zone, it will be up to the European Central Bank and the Germans to support them, and Paul Krugman, for one, isn't optimistic.
As I noted yesterday, any disaster scenario of what might happen has to take account of the current mess, with punishing levels of unemployment, grueling uncertainty re what tomorrow holds, and the seeds of deep social unrest. There's no happy ending from where we are, and the idea that the euro should be protected at all costs heavily discounts those costs.
Which takes me back to my terse summary: we don't know how this bounces. It's good that exposures have been lessened, but over to big Ben (Bernanke) for the last word:
"If there is a major financial problem in Europe," Mr. Bernanke told Congress in February, "there will be so many different channels on which that will affect our financial system that I would not want to take too much comfort from" the fact that the financial system has little direct exposure to Greece.
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
2) Too make up for the outsourcing of 80% of our private industry, the repub solution has been to create the largest socialist enterprise in the world, the U.S. military as a red state jobs programs...the irony.
Regards
just think of european " countries " as provinces in the country called the eurozone ------
They are our Greeces, just Greece has not been getting Blue state( northerm EU) welfare for 50 years.
How ironic that red state econonomic ideas work so well, that they are our poorest states, with the highest per capita food stamps/welfare... if you want to see how the repubs race to the bottom works-low wages.., just look to the south...
Regards
the eurozone needs a "federal government " but no one wants to surrender sovereignty
and the problem is the currency arrangement -----in the great world of international trade --floating/sinking currencies are supposed to balance/redress trade imbalances ----
but both germany and greece use the euro -and china has pegged its currency to the dollar ---
the result is one partner exploits its competitive advantages and is getting very rich while the other gets impoverished
for germany to bail out greece is a recognition that the currency set up being fixed via the euro needs redress via a return of some wealth to the partner being hurt by fixed currency
china may have to do the same with the US ---IE---- FORGIVE SOME DEBT
kicking greece out of the euro is a recognition that the central problem is that FIXED CURRENCIES across areas of disparate productivity capabilities are a cause of the problem
Source: Rick Steve's Europe Travel Special on KCTS 9, Saturday May 19th, 1:30 AM.
Greece's initial problem was that its debt ratio was too high to meet the standards for entry into the EU, but with the "help" of Goldman Sachs, from which Goldman profited mightily, they managed to fudge their books enough for entry. That meant when they crash hit and they had to bail out their banks, the economy wasn't robust enough to withstand it.
Because the Greek government was so corrupt, tax avoidance became a way of life, with the wealthy better able to shelter their wealth from the tax man. The Greek safety net wasn't particularly robust by EU standards.
Too bad Rick Steve doesn't know anything about economics and didn't look into the very different circumstances surrounding the difficulties some of the EU countries experienced.
All of this austerity talk in europe is, for the most part, garbage. Fun fact: The countries that actually made real cuts are doing better in the long run than those that didn't.
It can be argued that the fundamental fallacy in Western capitalism, perhaps in economic systems in every culture and empire, is permitting private unrestrained money lenders to gain the upper hand and monopolistic capitalism to go a muck. Once these conjoined forces control the economy they also corrupt the politics and corrupt the liberal government, whether through force or fraud.
In our present time of international monopoly and finance, there is a distinct possibility of a world dictatorship of oligarchs backed by the military might of a single nation. The entire earth would be engulfed by totalitarianism and despotism of the few capitalists left standing. Such are the fruits of unrestrained money and banking bonded to monopolistic capitalism. The people of the earth would return to serfdom and the matrix of nature.
If Greece was playing this game with its own currency, the Drachma, then, yes, banks have the powers you details. But I think the Euro confederation is a different street. Greece has an exit strategy, "we dare you to kick us out."
In our own nation the bad loans and obligations were accepted by a corrupt government and Federal Reserve for future leaders to contend. The future arrived earlier than expected.
Unlimited unemployment benefit is one of these. As unemployment rises, the government automatically spends more on unemployment benefit, regardless of the budget.
Germany also carried out a large fiscal stimulus package early on.
The countries that are doing the best are those that chose the fiscal stimulus route. My own country, Australia, used a large fiscal stimulus and saw a 0.1% rise in unemployment that has since vanished, and has just returned to a balanced budget.
What essentially went wrong in the US was that when the federal government applied fiscal stimulus, many of the states applied austerity, virtually cancelling the stimulus out. Nevertheless, the federal government had gone the other way, things would have been much worse.
The root of our problem is greed and an extremist ideology that is willing to take down the nation and subvert our democracy - just to remain in power.
It is so incredibly easy to believe we should have all sorts of entitlements. In the end, those entitlements will strangle you.
America is going to have a day of reckoning in the not too distant future. We can not possibly fulfill all the promised SSI, medicare, and Obama-care spending. Sadly, some people will be utter shocked when it happens. Too bad they weren't paying attention now. Unless we accept austerity now, we will pay for it doubly in the future.
We don't have to destroy the safety nets in order to balance the budget. Government revenues are at 14% of GDP instead of the historical average of 18% to 19%. We MUST have more revenue. Letting the Bush tax cuts expire and returning them to the Clinton levels would go a long way toward balancing the budget. The ACA, too, will bring down health care spending, which is one of the driving factors of our economic problems. But the last thing any sane economist would suggest would be to take money out of the pockets of those who are barely surviving as it is.
They will be out...it is just a matter of time (like months). I don't blame them and think it might actually be a good thing for them to pave their own road.
And, if there is a domino effect, that ultimately effects the US - then we will all have to figure our own roads.
If they get out of the EU, abandon the Euro and adopt their own fiat currency again, they'll have the ability to partially inflate their way out of the problem. It will be painful for a year or two but then the economy will begin to take off.
Austerity is never an effort to save a country's economy, but rather to save the investments of investors who made what they knew were risky and sometimes unscrupulous bets, by taking it out of the hides of the people who had nothing to do with causing the problem in the first place.