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Understanding the Greek Crisis – Can Greece Stay in the EU?

Greek Crisis for Dummies

 

merkeltsiprasSo, let’s think of European Union membership as a club, If you follow the rules you get to be in the club and use the official currency of club members, the Euro. Oh, and you get to use the club credit card too. The rules were essentially determined in a place called Maastricht (Maastricht treaty).

The rules talk about a lot of things like what criteria you need to join and to remain a member. The leader of this gang (I mean club) is Germany. Greece is one of the weaker members of the gang and did not really qualify under the rules of entry or for remaining a member, but everyone pretended that they did. That’s because all the EU gang members wanted to include as many nations as possible for the sake of appearance…and Germany especially had larger ambitions (shocking, right?), laced with a touch of lingering war guilt. So the German banks continued to lend Greece money and that encouraged the French banks to follow suit, and since they were doing it the private market started doing it. And once in the gang, there were privileges, like being able to borrow lots of money, despite the fact that your credit rating was sub-prime and you really never had a way to pay loans back to begin with.

Seeing that everyone was lending money, Greek politicians expanded their deficits year after year, making outrageous deals with labor unions on pension benefits for government workers in exchange for votes. These pensions were mostly being funded by the borrowed money, not from contributions from workers over many years, it was just a matter of time until it collapsed. This is exactly where Obama drew his election strategy. It was simple, promise free stuff to people, tell them they have the option to work or not to work, and you will have 47% of the vote before the campaign even starts.

In the U.S., the Federal Reserve Bank would be able to come in and lend money (and they did just that in 2008), but in the EU the Fed equivalent (the European Central Bank) is not really allowed to lend money directly to any one country. There are 18 countries in the EU, lending could get messy. But once again Europe pretended those rules did not exist and lent money to Greece anyway. And what did Greece do? They continued to borrow and spend.

Next stop on the gravy train was the International Monetary Fund or the IMF. This is an institution created, controlled and funded in large measure by the U.S. (The US funds approximately 18%). They joined the charade and pretended Greece would somehow be able to repay loans that would require it to be a country 10 times its size financially. In the process, most of Americans are smugly pointing the finger and thinking what fools the Europeans are for bailing out Greece, when about $1 trillion of US taxpayer money is floating around the IMF coiffeurs invested in Greece. Tomorrow, Greece will likely default on its repayment.

This has been going on for a while, but in 2008 private investors in Greek debt were given a bailout, the ECB and the IMF basically swapped the private debt to public debt and creditors took the money and ran, leaving taxpayers in the US and Germany holding the shitty end of the stick. However, some say the private creditors took a serious loss in 2012.  The IMF and the ECB facilitated at $107 billion debt restructuring as well in 2012 and they are digging-in on the repayment, but have been flexible on some of the term.

If that is not bad enough, Greece’s new ruling party Syriza wants to be forgiven roughly 50% of its debt, or it will willingly walk into default. The Greeks seem to think that this game of chicken will end with the EU and IMF blinking first. Unfortunately, they may be right. In the meantime, Greece (Greek banks) have implemented what are called capital controls. This means that they are limiting withdrawals of people’s money from banks to about $65 per day.

This coming weekend, Greek leaders are asking the citizens to vote in a referendum whether to accept the terms of the bailout. These terms will change pensions, and cut government spending dramatically. July 7 is likely to be the likely deadline for a final resolution. Quietly, EU leaders are also debating whether to expel Greece from the gang…finally.

Timothy Kelly
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