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.
2) Greece boomed in the early years of the euro
To understand both Greeks’ emotional commitment to the Eurozone and Europe’s stingy attitude toward Greece, it’s important to realize that Greece experienced a wild boom in the early years of European monetary union.
Before the euro, different countries’ governments paid wildly different interest rates because lenders knew there was a risk of currency devaluation. Greece, in particular, was saddled with high interest rates since its economic policies were held in low esteem and it was widely believed the country would need to resort to devaluations.
When the euro came into place, those worries vanished — and, wrongly, were not replaced with worries about Greece paying off its debts — which lead to plunging interest rates for Greek bonds. This let both the Greek government and the Greek private sector go on an unsustainable borrowing binge that created extremely rapid debt-fueled growth. In retrospect, both the borrowers and the lenders should have known better but it is what it is.
3) The eurozone doesn't treat Greece the way America treats Kentucky
Massachusetts has been richer than Kentucky for as long as Kentucky has existed and that shows no sign of changing. California, too, is richer than Idaho. Since the United States of America has a system of taxes and spending that transfers money from rich people to poor people, it also transfers money from rich states to poor states. We could record this history of transfers as a large debt that Kentucky owes to Massachusetts that someday needs to be repaid.
But we don't. And the government of Massachusetts doesn’t waste its time lecturing the government of Kentucky about the need for Massachusetts-style structural reforms to revive its dysfunctional economy.
The United States is not unique in this regard. London and the Southeast subsidize northern England. Northern Italy subsidizes southern Italy. Alberta and Ontario subsidize Atlantic Canada. The former West Germany subsidizes the former East Germany. The reason is that once high-value industries are established in particular places, it is very difficult for other regions to fully catch up — New York, London, Frankfurt, Milan, and Toronto all serve as draws for talent from throughout the country and absent ongoing transfer payments back to poorer regions you would see a path of endless divergence.
To function smoothly, the Eurozone would need to have some of these cross-subsidies. Taxpayers in Germany and the Netherlands would have to commit to subsidizing Greece and Portugal on a constant, ongoing basis without fussing the Greeks and the Portuguese about it too much.
That German and Dutch voters aren’t excited about this idea is perfectly understandable. That they think it’s reasonable for a currency union to work despite these kinds of transfers is less understandable.
4) Greece's debt crisis has been managed terribly
The roots of the current crisis lie in the botched handling of the previous Greek debt default crisis. Irish economist Karl Whelan has written an excellent overview of this for those who’d like to delve in deeper, but in broad strokes:
- Greece owed a bunch of money to European private banks that it could not pay.
- Rather than have Greece default, and then possibly need to bail out their own banks, European governments gave Greece giant loans so Greece could pay the banks what they owed.
- This left Greece owing foreign governments money that it could not pay, which put Greece in a position of political subservience.
- This succeeded in kicking the can down the road for several years (no small accomplishment) but it didn’t change the fact that Greece lacks the means to pay what it owes and foreign governments lack the means to govern Greece.
The current crisis is what happens when people stop trying to kick the can down the road.
The Greek government is demanding that it be able to choose for itself what Greek public policy looks like, and Greece’s European partners are demanding that Greece live up to its commitments if it wants their money.
5) Greece's leading political party, Syriza, sold Greek voters on a lie
In its successful 2015 electoral campaign, Syriza told the Greek electorate what it wanted to hear: that there was a path out of the nightmare of austerity and external political control into which Greece had fallen that didn’t involve leaving the Eurozone.
This simply wasn’t true.
For it to be true, European governments would need to have been willing to write Greece blank checks worth billions of dollars. This isn’t by any means a crazy idea — again, Kentucky gets large, blank checks from Massachusetts because that’s how things work — but it was obviously a non-starter in the Eurozone. The only way to free itself from European shackles has long been for Greece to quit the Eurozone. One suspects that at least some of the movers and shakers in Syriza knew this to be the case, but it was a bad electoral message the party didn't want to send.
6) Syriza is marginalized in European politics
Syriza is not Greece's traditional left-wing party; it's a different, further-left party that rose to power by displacing the traditional Greek social democrats. Each European country has its own political parties and party system. But, broadly speaking, European parties fall into a few big "families" that have similar ideologies and also meaningful cross-national institutional ties.
- In every country, there is a Socialist, Social Democratic, or Labor party that is the largest left-of-center party.
- In every country, there is either a Christian Democratic Party, a "liberal" (like a watered-down version of a US libertarian) party, or both comprising the mainstream right.
- In many countries, there is a Green party, ideologically on the left but with a more upscale voting base than the traditional Social Democratic Party.
- In many countries, there is a populist anti-immigrant party, broadly on the right politically, but often operating with the conceit that kicking out immigrants could strengthen the welfare state.
- In many countries, there is a far-left party, often with institutional heritage related to the local Communist Party.
In present-day Europe, Greece is the only country whose coalition government is led by a far-left party. Indeed, far-left parties have never led a coalition in any other European country. And in a bunch of European countries — including Germany, France, and Spain — the far-left party and the center-left party are not on good terms.
Consequently, there is a fairly broad sentiment in Europe, including among left-wing parties, that Syriza’s fall from power is something that ought to be welcomed.
7) Austerity is a red herring
You hear a lot about "austerity" in the context of the Greek situation. This is in part because Greek fiscal policy has been very austere over the past several years, with the government cutting spending more drastically than any other in Europe.
But mostly you hear a lot about austerity because austerity was a very real issue in British and American politics during many of the relevant years, and if you read article on the internet in English you find yourself exposed to the preoccupations of Americans and British people.
In Greece’s case, however, austerity is largely a red herring.
In the US or the UK, austerity was a choice: financial markets were happy to keep lending the two countries more and more money to cushion their recessions.
But the Greek government didn't have a choice: it couldn’t run a bigger budget deficit. Nobody would lend them the money! Greece’s European partners have demanded a lot of austerity from the Greek government in exchange for their money, but absent that money Greek fiscal policy would have to be even more austere.
Often, when people criticize the austerity measures in Greece, what they are saying is that Germany and France should have given Greece more money. And maybe they should have! But they didn't, and in the absence of such subsidies, running a more stimulative economic policy wasn't an option for Greece.
8) The problem with Germany constantly demanding reforms in Greece
The other thing you hear a lot about with regard to Greece is "structural reform," which Greece’s creditors want the country to undertake.
It’s easy to see from the broad economic aggregates that Greece really would benefit from some kind of reform. Even at its pre-crisis peak, Greek GDP per capita was much lower than the GDP per capita in Germany or the Netherlands. And Greek labor productivity per hour worked was dismal by European standards.
The Greek tax collection infrastructure was legendarily ineffective, and the Greek civil service is shot-through with patronage. If Greece managed to achieve the level of governance professionalism and economic performance of the average European country, then Greece’s ability to repay loans would be greatly enhanced.
But here’s the problem: if Greece managed to achieve the level of governance professionalism and economic performance of the average European country, then this would also be great news for Greek citizens. If there were lots of ideas that would be clearly effective and politically viable, Greek's elected governments would be doing them on their own.
External pressure and expertise can help with this at the margins, but only at the margins. Greek elites are well-aware of what foreign elites think they should do and "a bunch of experts from Germany and Finland really think we should do this" is not really the kind of argument that breaks political logjams.
Meanwhile, the foreign governments pressing Greece for reform are also political actors. Consequently, outsider demands tend to focus disproportionately on things that are salient in their own domestic politics rather than on game-changing solutions to Greece’s problems.
9) It’s in Europe’s interests to make things tough on Greece
Greece is an outlier in Europe. But it’s not unique. Lurking behind it are the relatively poor and relatively indebted economies of Portugal and Spain, and arguably even Italy. When Greece stiffs its external creditors and threatens to leave the Eurozone, that makes creditors wonder whether Portugal and Spain and Italy might someday do the same.
Consequently, it is broadly in Europe’s interest for whatever Greece does to end up being as messy and painful as possible. Europe needs the message to Portugal to be, "Wow, that was a disaster, let’s avoid that by any means possible" not "Well, that was uncomfortable but it worked out fine in the end."
10) This probably doesn’t matter for you
The Greek situation is fascinating, and of course, it’s crucially important to Greek people. But unlike some earlier iterations of European debt drama, it is very unlikely to impact you personally.
After months (if not years) of highly public wrangling, a Greek default and departure from the Eurozone is completely predictable. Any financial institution that was even slightly paying attention was aware of this possibility, and while the news certainly moves markets there is no reason to think it will spark any kind of panic.
11) If you’re vacationing in Greece, you should bring cash
The big exception here is if you are planning a vacation to Greece. If that’s the case, the precedent of Argentina (which has been in a somewhat similar situation) suggests that it is probably in your interest to bring a fairly large quantity of paper money (both dollars and euros) into the country since physical currency is likely to be in high demand and the banking system is crippled. Greek individuals will face legal difficulties in turning their money into foreign currency, so opportunities will likely arise to pay for things in paper dollars at a steep discount compared to the official exchange rate.
If you are considering this vacation, definitely take it.
The truth is that increased tourism is one of Greece’s best chances for recovery. The country desperately needs foreign buyers and more economic activity, and in the short-term, purchases by tourists attracted by cheap vacations in Greece is one of the best chances for making that happen. Buy stuff to take home. Mail care packages of olives to your friends.