All about the Greek Crisis! Greece’s long-simmering economic crisis has finally boiled over into a full-fledged political and financial meltdown — banks are closed, Greek citizens’ ability to withdraw cash from ATMs is limited, a default on Greece’s debts to its fellow European countries looks overwhelmingly likely, and the odds of the country being forced to leave Europe’s single currency look very strong.
Yet for all the drama, Greece itself is a rather small and economically marginal country. Consequently, a lot of the commentary about the Greek crisis sheds less light on the actual situation in Greece than it does on the political opinions of the writer. If you actually want to understand Greece, though, these are the key facts you need to know.
1) The Eurozone is a bad idea, economics-wise
Before you blame anyone in particular for the disaster unfolding in Greece, it’s important to understand that the underlying concept of the Eurozone is badly flawed. Foreign observers as ideologically varied as Milton Friedman and Paul Krugman have said all along that joining a group of quite distinct European countries into a single currency would end in tears.
Foreign certainty that the Eurozone was a bad idea was so widespread that back in 2009 before everything collapsed, the European Union produced a mocking paper titled: “The Euro: It can’t happen. It’s a bad idea. It won’t last. US economists on the EMU, 1989 – 2002.”
The Americans were badly wrong about one of these things — the mere fact that European Monetary Union is a bad idea didn’t stop the EU from doing it, and it hasn’t quite collapsed yet even though it’s caused a lot of suffering.
The basic problem, however, is quite simple. When a given country’s economy falters, one of the easiest ways for it to adjust is for its currency to decline in value relative to other countries’ currencies. This reduces the country’s citizens’ real purchasing power — there’s no getting around the bad news — but has the upside of boosting the country’s exports and tourism. In other words, it lets the country respond to an economic crisis by putting people to work making things.
A country that lacks this flexibility is much more likely to absorb economic pain by entering a prolonged period of mass unemployment. Which is what’s happening to Greece now.