Global Crisis Blog

What We Learn from Greece’s Crisis

   What can we learn from Greece’s debt crisis?  This is the question raised by Paul Krugman in his recent NYT column. 

     (As he wrote it, the EU was waking up and coming to Greece’s aid, belatedly. Germany has dragged its feet on this bailout for months, and the euro has plummeted as a result.   Germany’s position was: Why should German  taxpayers bail out the Greek spendthrifts?  Answer:  If you don’t, Germany and all Europe will suffer.)

     It is not a debt crisis, Krugman rightly observes.  Greece’s debt burden is not excessive. 

     What is the problem, then?

     It is a “I’ve painted myself in the corner” problem.  Greece is in the EU, adopted the euro (abandoning the drachma) and now cannot devalue its currency to boost its economy.  It is stuck with the euro.  It could withdraw from the euro zone, but that would cause a huge run against Greek bonds and stocks.   Greece cannot raise interest rates, because those are now set by the ECB, the European Central Bank.  Greece cannot ‘inflate’ to reduce the debt burden, as other nations have done in history, because, frankly, what Greece needs to do is deflate,  lower its wages, prices and costs in order to become more competitive within Europe.  But if it deflates, the debt burden becomes much more onerous, rather than less so. 

     Even if the EU does bail Greece out in the short run, long run structural problems will remain.  And Greece is not alone.  Other nations, like Portugal, Spain, and Ireland, perhaps even Italy, share them.   Consider America.  When California has a huge real estate bubble, and goes nearly bust, there is little the Federal Govt. can do to help California specifically, at a time when other parts of America are doing better.  This is the problem with an integrated economy.    There are big gains to such integration (a large efficient Single Market) but big problems, when a part of the market gets into trouble.

     So what can Greece do?   Savage spending cuts and tax hikes, says Krugman, to slash deficits and reduce borrowing.    But this would worsen unemployment and cause political crisis.  We are left with a Hebrew saying:  Wise people (or countries) avoid crises clever people (or countries) can get out of. 

     Greece is not wise.  Hopefully it will be clever.