The Problem with Greece and the Debt Crisis
by Barbara_Donnelly_Lane
 Politics
October 22, 2012 08:52 AM | 3553 views | 3 3 comments | 19 19 recommendations | email to a friend | print | permalink
There’s a problem in Greece.  This matters to the United States because the European Union is a major trading partner.  Greece seems on the verge of collapse.   If Greece collapses, there could be a toppling of countries like so many dominoes throughout the eurozone, possibly a collapse of the euro as a currency.

Why does this matter?

The United States has been limping along for multiple years with a struggling economy, which currently projects nothing but anemic growth rates.   A major disruption in European import/export markets would be calamitous.  

So what’s the problem in Greece?



This is a complicated question, and politics play a part in convoluting the answer.   To try and make some sense of the matter, I attended two excellent lectures that were open to the public at Georgia State University to try and gain some insight.  A German gave one speech.  A Greek gave the other.

First, a member of the Bundestag, which is a political body similar to our Congress, Harald Leibrecht spoke on October 3.  The main thrust of his speech was that global markets are tightly tied.  The US and Germany have long shared values and interests that make us natural allies and trading partners, but transatlantic relations should never be put on “autopilot.”  Rather, communication and cooperation is constant between valued friends.   

Leibrecht then touched upon the financial crises in Greece and other EU countries.  He said Germany is dedicated to tackling European debt with fiscal discipline; however, there are political limits to financial bailouts that come from Berlin, as German taxpayers are not prepared to absorb all the debts of other peoples.

Furthermore, while the European Central Bank sets monetary policy for seventeen eurozone countries, the ECB is much weaker than the Federal Bank in the United States. Twenty-seven different fiscal policies of EU member states complicate matters.

“Unfortunately,” he lamented with a charming smile, “no one has yet written a book called Solving Debt Crisis Made Simple.” 

The second speaker I heard, Vassilios Galoussis from the Greek Consul, would agree that the financial situation in Europe is very complicated.  On October 11, he offered some Greek perspectives on his nation’s precarious position.

Echoing Leibrecht on some points, Galoussis said one problem that must be understood when studying the debt crisis in Europe is that those who participate in the eurozone have a common currency but no institution like the Federal Bank, no lender of last resort.  Therefore, “bailouts” in times of crisis come not from the European Union itself but from other sovereign nations within the eurozone. 

To understand the implications of this reality, imagine California having to borrow money bi-laterally from Georgia.   This would cause massive resentment between states as well as practical problems for state politicians.

Furthermore, with a common currency but no federal system to guarantee deposits, bank runs have become a perennial problem for Greece. 

Think again about California and Georgia. 

If you deposited money in a bank in California, the FDIC would guarantee this money.  Therefore, if you lived in California in a time of financial crisis, there would be no reason to run to the bank and move your funds to another state with a more stable outlook like Georgia.

Not so in the European Union.

Bank runs have occurred often due to panic in the streets, and much needed capital has been moved outside of Greece to other eurozone countries, which further paralyzes the Greek economy. 

Additionally, while austerity measures are seen as a necessary part of any long-term solution—and Greece has cut its debt an amazing 8-9% in just two years—austerity (especially when coupled with fiscal policy that incorporates tax hikes) can slow a country’s economic growth, which can then dig a deeper fiscal pit.  Therefore, the problems in Greece are not as easy to fix as simply slashing budgets.  

Ultimately, both Leibrecht and Galoussis seemed to concur that every country has specific economic and political needs that must be taken into consideration.   Therefore, visionary leadership is required for the European Union to move forward, which brings me back to the United States.   

While we are not in the eurozone, we have our own fiscal cliff looming on this side of the ocean. American debt issues are unique and should not be compared to those in Greece.  However, our highly polarized Congress seems frozen in a period of inaction.

For the United States to move forward, we, too, will require visionary leadership that seeks more compromise between parties.  So far, there hasn’t been much evidence of this existing on our side of the pond. 

Comments
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B D Lane
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October 23, 2012
Thank you very much for reading the column and adding comments. I think it's always important to try and understand the complex relationships that exist between money and fiscal policies abroad as well as here at home. After all, in the midst of our own very heated election season, it is easy to neglect thinking about the financial struggles of crucial transatlantic partners, but this--I think--is a mistake in the long run.
Dr. Mike Donnelly
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October 22, 2012
Excellent article but I disagree that Romney cannot solve the crisis. First of all I am convinced he will win and secondly he will have enough Republican and Southern Democrats to take appropriate action. Ronald Reagan faced a worse economy that Obama did when he took office. Even without a majority RR worked with the Congress to get things done. Romney can do the same and I think he will.
Oliver G. Halle
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October 22, 2012
Barbara, this was an excellent, informative, nonpartisan analysis. I don't see much hope ahead, regardless of who wins in November, for the two sides to come together. We are paying a price for the congressional district lines that have been drawn over the years to ensure that the incumbent is all but guaranteed victory. Look at the number of safe districts in Georgia of both parties. If John Barrow loses his seat you can look forward to another career congressman. There is no incentive to compromise if you can count on 80% of the votes at each election.
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