Before the turn of the twentieth century, America’s premier financier, John Pierpont (JP) Morgan, famously coined a phrase which has since become a common saying in the English language. Morgan remarked that, “If you have to ask how much it costs, you can’t afford it.” More than a century later, Morgan’s comments could be used to characterize the ongoing disorderly unraveling of the Greek economy. The breakdown of Greek social structure and law and order which have accompanied the nation’s economic collapse pose a very real threat whose consequences could spill over into other Mediterranean countries and could scuttle the viability of the European integration project.
Nearly all of the Mediterranean nations within the European Union’s (EU) seventeen member economic and monetary union known as the “Eurozone” are frozen in a state of economic paralysis due to unsustainably expensive social welfare programs, crippling deficits and runaway public spending. Add to that the lack of political will needed to implement the austerity measures and structural reforms required for slowing the EU’s economic free-fall and for initiating a path towards economic solvency. At the same time, a signal must be sent to global markets that the EU will not continue to spend more than it can ever hope to repay. However, no other EU country is in as dire a condition as Greece. Greece has been the focal point of violent protests, looting and widespread social disruption caused by both depression-era unemployment rates and a population that is unwilling to make the lifestyle sacrifices needed to begin the painful task of putting Greece’s financial house in order. One particular example is worth highlighting as characteristic of the unsustainably expensive social programs that have allowed the small nation to accumulate deficits and debt large enough to threaten the global market. If you were a member of Greece’s swollen public sector, the year would have fourteen months instead of the twelve months everywhere else. That is because Greek public sector employees receive fourteen monthly paychecks per year. Nor does this extraordinary practice end when a public sector employee retires. In fact, former Greek public sector employees receive fourteen monthly pension checks for the remainder of their lives.
Nonsensical forms of spending such as this, coupled with rampant fraud and unwillingness to pay income taxes, have resulted in a lack of the capital reserves necessary to keep the nation afloat and have led to runs on Greek banks which, as a whole, have lost upwards of 30% of their deposit values over the past two years. Without another injection of stimulus funding from Germany, the most economically and politically powerful nation in the EU, as well as from the European Central Bank (ECB) and the International Monetary Fund (IMF), Greece will run out of money by July. Almost immediately thereafter, it will default on its debts. The prospect of this scenario is heightening fears among policymakers and politicians across the globe and is initiating discussion amongst ECB bankers and other economists about the possible consequences for global markets should Greece exit the Eurozone either at the behest of the other member states or by its own choice.
Still, more than three quarters of Greeks continue to express their desire to remain in the Eurozone and the EU despite the fact that they are adamantly opposed to making the financial and lifestyle sacrifices required to do so. To make matters worse, Greece is hurtling towards another election in which the man who may well be the next Greek prime minister is a 37-year-old by the name of Alexis Tsipras who serves simultaneously as both the president of Greek’s ultra-left political party Synaspismos and as the leader of the Greek parliament’s Coalition of the Radical Left, better known as “SYRIZA.” Tsipras is riding a wave of popular support due to his election platform of calling the bluff of the IMF, the ECB and Germany by insisting that Greece will be permitted to remain in the Eurozone even if it refuses to implement the austerity measures and structural reforms which were attached as conditions to earlier bailouts. This is clearly a risky and unrealistic proposition.
The more likely scenario is that Greece will eventually fail to receive further financial assistance from the international community and will subsequently default on its debts, eventually being forced to leave the Eurozone. This would not be pretty. The consequences could be further rioting, pillaging and unemployment, all sending a dangerous shock wave through the global economy. Other struggling nations within the EU would have to face the fear that they too could be next in being forced to fully implement the required austerity measures or be cut out of the EU’s Eurozone. Even worse, the global economy which is struggling to maintain a modicum of growth, could be sent into a tailspin since fear and uncertainty almost always send markets into a steep decline.
Yet, regardless of whether Greece were to exit the Eurozone of its own free will or not, some are speculating that the economic consequences would not be that severe once the protesting, rioting and looting have subsided. Greece would have to abandon the euro and return to using its old currency, the drachma, thereby implementing a plan of rapid currency devaluation which would make the country a more competitive place to do business and hopefully boost Greek exports at the same time. Such a path back from the economic brink has worked before for other nations but Greece may not be able to enjoy the same results as Argentina which successfully pursued this policy option in 2002. Unlike Argentina, Greece has a limited volume of exports and fewer profitable business ventures to offer at the reduced price that its newly reinstated and devalued drachma would support given that the Greek economy relies predominantly on tourism, agriculture and shipping.
And so, Greece like other Mediterranean nations within the EU continues to limp on towards an uncertain future. But if the international community’s patience wears thin and if current trends in markets persist, Greeks may find out the hard way that, “If you have to ask how much it costs, you can’t afford it.”
