Greece: Too Big to Fail

Greece is a pretty small player in world politics, so ordinarily no one would care all that much about Greek economic woes. But fortunately for Greece - and unfortunately for the rest of the Eurozone - Greece is also a member of the Euro currency. If the Greek economy is allowed to continue imploding, it will sharply decrease the value and stability of the Euro, which will hurt the rest of the Eurozone economies - including such larger world players as France and Germany. It might also push over the edge some of the other wobbly members of the Eurozone like Portugal, Spain, and Ireland, and from there we'd see a giant domino effect. Bad mojo for everyone.

Also, if the Greek government defaults (i.e., declares bankruptcy), anyone who holds Greek debt stands to lose their money. Apparently a lot of Greek debt is held by French and German banks. It's conceivable that the banks would have to be bailed out by their respective governments in order to survive a Greek default, though no one really knows at this point. But in any case, a Greek default would suck for those banks, but would not (as I understand it) by itself necessarily have catastrophic effects for the rest of Europe. Except, of course, in conjunction with the the aforementioned collapse of the Euro.

So, pretty much everyone agrees that Greece should not be allowed to default.  The problem is, all the potential ways to avert this disaster are very unpopular with pretty much everyone.

Germany is the economic powerhouse of the Eurozone, followed by France, so any EU bail-out of the Greek economy is going to be primarily financed by them. (Also by the UK, who IS a member of the EU, though not the Euro; I'm really not sure why we haven't heard more about them during this crisis - British citizens are the most Euro-skeptic of them all, so surely they should be making a lot of unhappy noises about this?) Anyhow, not surprisingly, the average German citizen is pretty pissed about having to bail out the Greek economy. Greece's economic woes are entirely the fault of the Greeks; why should Germany have to pay to fix them? And it's not like Germany is in amazing financial shape itself (no one is, given the recent recession) - shouldn't Germany be spending its money on fixing its own problems?

I mean, can you imagine what the average American citizen would say if the American government suddenly announced that we were going to give Canada $40 billion to fund Canada's run-away socialist spending? (In fact, Canada's economy is in excellent shape, better than the US's, but you get the point.)

So, with great reluctance, the German government agreed to a €30 billion EU bailout for Greece, in conjunction with a €15 billion IMF bailout for Greece. It's politically very unpopular in Germany, and comes at a very bad time for German politicians, who face elections next month. So the German parliament is threatening to basically veto the deal. Everyone's hoping that the German parliament will pass it anyway, because it's almost certainly in the long-term economic interest of Germany to pass it. But it's definitely against their immediate political interest, because Ye Average Citizen does not want to hear that they have to pay to fix another country's awful economy when their own is already hurting.

As a side-note, so long as the Germans do eventually agree to this bailout, the foot-dragging is brilliant for the German economy, because all the anxiety  about the potential for a Greek default decreases the value of the Euro. A lower Euro is excellent for Germany, because Germany's economy is export-driven (it's the second or third biggest exporter in the world), and the high Euro of the past few years has been hurting the German economy. A cheaper Euro means German goods are cheaper for non-Euro countries to import. Some analysts think that the German foot-dragging has thus been deliberate, for this exact reason. These same analysts are not worried, because they think the foot-dragging is just stagecraft, and that of course Germany will eventually pass the bailout.

Unfortunately, even if the German parliament does suck it up and passes the bill, there are even bigger problems looming ahead.

Problem numero uno: an increasing number of economists think that, while the combined EU-IMF €45 billion bailout package - which is for one year only - is a nice start, Greece probably needs almost double that amount - €80 billion - in order to avoid a default within the next couple of years. It's been hard enough to muster the first €45 billion; the political will to find another €35 billion is currently non-existent, and it's hard to imagine that political support for a second round of bailouts will be much higher in a year.

Problem numero dos: the EU-IMF aid sensibly comes with a whole host of conditions. After all, if Greece wants to receive a massive bailout funded by other countries' tax-payers, then Greece is going to have to agree to get its economic house in order. This means cutting social programs, raising taxes, etc. The bailout is meant to buy Greece time to do this, not to become a permanent part of the Greek annual budget. Needless to say, the cutting of social programs and the raising of taxes, all amidst a recession and high unemployment, is massively unpopular in Greece. There have been massive strikes in Greece ever since the government first started announcing austerity measures. The IMF is imposing even more stringent conditions on the Greeks than they'd already imposed on themselves; even the Greek government now has the gall to complain about the IMF "impositions." It's unclear if the Greek government is actually capable of carrying out the necessary reforms.