clock menu more-arrow no yes mobile

Filed under:

The Greece crisis doesn't scare the Eurozone anymore

Milos Bicanski/Getty Images

Years ago, back when the Greek debt crisis and attendant political machinations in the Eurozone first hit the headlines, the media was full of people screaming at you to pay attention to arcane fiscal disputes in far-off European capitals. And they were right. At the time, there was a serious risk of financial contagion from Greece to other European countries that could have lead to the collapse of the Eurozone and all kinds of wild consequences for global banking, the world economy, and other big, important things.

Now Greece's debt woes are back in the headlines, and if you want to get caught up, we've got you covered. But if you don't want to get caught up, that's okay! There's a big difference between this round of Greek drama and the previous one. This time it's really not that important. You don't have to pay attention.

The Greek crisis is very important for Greece

The crisis in Greece is very important for the nation of Greece. If you are Greek, if you live in Greece, if you have family in Greece, etc., this is very important.

Basically, if Greece cannot work out a new deal with the people to whom it owes money (primarily the European Central Bank, the International Monetary Fund, and various richer European nations), then Greek people are going to experience some (more) terrible economic pain.

Their country may leave the Eurozone, or the country may continue to formally use the euro but with Greek people unable to take their euros out of the country or exchange them for foreign money. Either way, the best-case scenario would be a healthy bout of inflation complete with lost savings and reduced incomes for pensioners and public employees followed by a reduction in the unemployment rate. The worst-case scenario would be the rapid breakdown of Greek politics and the further rise of the neofascist Golden Dawn political party.

Long story short — Greek people should pay attention to the Greece news.

The previous Greek crisis was important for everyone

Note that list of people to whom Greece owes money. Those are governments and government-backed institutions, not banks and individual investors.

That's not an accident, it's a consequence of the resolution of the last Greek crisis.

When that crisis happened, lots of Greek debt was owned by foreign banks. And lots of those banks also owned the debt of other European countries — notably Ireland, Portugal, and Spain — which had been hit by devastating recessions. This led to two big ways that Greece's crisis could become everyone's crisis:

  1. A Greek default could imperil the solvency of some foreign banks.
  2. A Greek default could lead people to anticipate defaults from other countries.

In other words, a Greek default could have led to runs on both foreign banks and whole foreign countries, as panicky investors started selling things. And then behind the four PIGS (Portugal, Ireland, Greece, and Spain) lay Italy, a massively indebted country whose economy is also far too large for the rest of Europe to be able to avoid a bailout. People feared a worst-case scenario of cascading national defaults and the chaotic, unplanned collapse of the Eurozone. If that happened, the US economy, which was still fragile following the 2008 recession, could've fallen back into crisis.

But in the end, Greek politicians and German politicians worked out a bailout deal. Then the European Central Bank assured everyone that no country would be forced into default as long as it was playing by the austerity-minded rules of Eurozone elites. There was no contagion.

Today, Greece is isolated

Greece is in crisis today because the deal the previous crop of Greek politicians worked out forced a steep fall in Greek living standards. The Greek government had to pursue a very austere fiscal policy, enact a series of unpopular changes to labor law, and, by staying in the Eurozone, was unable to use currency depreciation as a way of spurring job creation. As a result, Greece's unemployment rate has hovered at more than 20 percent for years.

Naturally, Greek voters were angry about this. So they turned to an opposition political party — in this case the far-left Syriza — to lead them out of the abyss. And since January, Syriza has been asking for a better deal.

But Syriza has a problem. The old risk that a Greek meltdown would burn the entire Eurozone has gone away. Greece's debt is in the hands of European governments, which are using that debt as a means of political control to force Greece to change its policies, not as an investment. And the European Central Bank is fully backing Portuguese, Spanish, Irish, and Italian debt, since all four of those countries are sticking with the program. If Greece defaults, nothing terrible happens to the rest of Europe. Syriza is playing high-stakes poker, but it has no cards, and everyone else at the table knows it.

European elites care more than you'd think

This naturally raises the question of why the drama keeps happening at all. Why don't Greece's partners call the bluff and walk away from the table?

The reason is that the Eurozone is more of a political project than an economic one, and it's one that most of Europe's politicians believe in. If Greece were to leave the Eurozone, that would be a blow to the prestige of the project. Non-Greek politicians (and the voters they are accountable to) are not willing to pay a large price to avoid this outcome, but they are willing to pay something. Consequently, though Syriza isn't going to get anything close to what it promised Greece's voters, it really can get some kind of more generous deal.

This has left Europe in an endless cycle of negotiations that break up, only to return, only to break up again. If a deal is reached, it will be at the last minute, and it won't drastically alter the status quo. If a deal isn't reached, we won't know until the last minute, and it won't have big consequences for the rest of the rest of the world.

So if you're Greek, you really should be paying attention to this news. And if you're just interested in high-stakes economic stories, it's a fascinating, important story. But if you find all this mind-numbingly dull, well, this isn't 2010. It's okay to just read some stories about Donald Trump.