The Greek crisis for dummies

June 28, 2015

The drama is more complex than the economics. Our summary: 

  • The Greek government overspent its budget. They’re not the only ones, but somehow they were able to sell investors on the idea that Euro Zone countries would not default. This allowed them to get into deeper trouble than other countries doing the same. Argentina, for example, has much less debt relative to the size of its economy, in large part because no one will lend to them.
  • The EU and IMF made it worse. They lent the Greek government more money to avoid the kind of extreme cuts in spending (“austerity”) that would be a fact of life if they had to finance government spending with their own tax revenues. Overdue debt to the IMF is the trigger for the latest drama.
  • The design of the Euro Zone was faulty from the start. Among other things, it has no exit strategy. And the TARGET2 system that clears cross-country payments is almost perfectly designed to trigger bank runs. (Although Kim Schoenholtz wonders what took Greeks so long to move their money out of Greek banks to safer ground.)
  • Greece’s economic environment is horrible. Well, maybe not horrible, but what would you call a ranking between Russia and Tunisia?
  • Greece has no leverage. Yes, we get that they’re mad, but they have no cards. Prime Minister Tsipris has called for a referendum in what has to be an attempt to shift blame.
  • This crisis has set records for longevity. It’s been brutal for the Greek economy, but our students lost interest several years ago. We’re ready to move on.

One Response to “The Greek crisis for dummies”

  1. de sack Says:

    Oh, if your students have lost interest we should just destroy the lives of the Greeks and move on. Great point.

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