Tuesday, May 25, 2010

Greek Formula

I wonder how many of you have been following what's been happening in Greece.  It seems too far away and such a small country to have much effect on our lives, but it may be more important than we think.  Actually, it isn't so small, having the 27th largest economy in the world.  Our whole planet continues to struggle with the economic uncertainty precipitated by missteps in this country.  As things teeter totter along, situations in countries like Greece (and Portugal, Ireland Italy, Spain -- a/k/a PIIGS, European countries that have high debt to GDP ratios) threaten to tip the seesaw. 

So we have Greece, a member of the European Economic Community (EEC), needing help like Goldman Sachs and Citigroup.  Its recovery is critical to the EEC because about 8 years ago the members of the EEC began an experiment, using the same currency, the euro.  What happens to the euro in Greece affects the other members.  If things don't go well, the other members may choose to return to independent currencies.

Don't take my word for this, it's not my expertise, but I'm going to keep going, hopefully not walking off a cliff.  What I find fascinating is that the 27 countries that are members of the EEC have different cultures and varying economic expectations, yet they've agreed to link their economic fortunes.  For example, as I understand it, the older cohorts of government employees in Greece have been able to retire fairly young and lived their careers expecting employment for life.  Part of the deal Greece has made to obtain its bailout is to implement an austerity program, reducing the largesse for which its government has become known.  Unhappy with the austerity plan, some Greeks have demonstrated and violence has resulted.

Put yourself in the shoes of a citizen of another EEC member country, where government benefits are less generous.  As you watch these Greek citizens march in protest, how do you feel about the money your country is contributing to help them climb out of their financial mess?  The U.S. is a contributor to the International Monetary Fund, which also is providing funds, so some Americans might feel the same way.  In fact, I remember Americans complaining when their tax dollars helped our government offer workout arrangements to home borrowers whose loans went bad as part of our subprime lending crisis -- people who bought houses they shouldn't have because they couldn't afford them.  

"So I guess you're saying we're all interconnected?" says Virginia. "Can you get back to why Greece might affect us?"

Well, for one thing, the euro has been falling in value relative to the dollar, with some economists expecting the two currencies to reach par ($1 = 1 euro) pretty soon.  This means our exports are becoming more expensive to Europeans at exactly the time we're hoping our domestic economy kicks into gear and starts producing more, so we can hire more people.  If our exports cost more, Europeans will buy fewer of them, so we won't get more jobs after all.  Conversely, European exports are cheaper for Americans, so we might buy their goods instead of our own.

"Aw shucks," says Virginia.

1 comment:

  1. This is the second time I've tried to post a comment...guess my google account is not...
    Anyway, I learned domething from your expanation. My attitude has been..."and why should I care?" I am editing Bari's papers for her on-line class. Keeps me busy.jak