economics
By Margaret Hartmann, senior editor for Intelligencer who has worked at New York since 2012
Security guards stand at the entrance as pensioners wait to collect their pensions from the National Bank of Greece on July 2, 2015. Photo: Yorgos Karahalis/Bloomberg/Getty Images
Markets around the world are in a near-panic after Greek voters rebuffed the nation’s creditors in a national referendum over the weekend. But what does it all actually mean? Well, that’s not necessarily an easy question. It’s been three years since we brought you our last Moron’s Guide to the Euro Crisis, and it continues to be a thing you should probably know about. You may think you’ve got it covered: The Greek economy is in trouble again, people are lining up at ATMs, and something bad is about to go down at Euro Disney. But trust us, when Greece’s financial troubles come up at your next family gathering, you’re going to want to understand the potential impact on the eurozone and the European Union — or at least be able to nod knowingly as your aunt worries about what this will do to her 401(k). Here’s a brief guide for the woefullyignorant.
Hey, long time no see. This should be easier than usual. I actually know a lot about Greek history!
Oh, great! So as you know, Greece was in particularly rough shape after the 2008 financial crisis, and in 2010 it took bailout money from “the troika” — a fancy name for the European Commission, the European Central Bank, and the International Monetary Fund. That didn’t do the trick, so it took another bailout in 2012, for a grand total of €240 billion. But those bailouts were accompanied by harsh austerity measures…
Whoa, I meant, like, ancient Greek history. You know, the Persian Wars, Xerxes — oh, and McNulty!
You have 300 onBlu-ray.
Right. I thought the Greeks were total badasses. Why is their economy tanking?
Well, as I was saying, lenders told Greece that they had to implement austerity measures, or tax increases and steep budget cuts. This involved reducing wages, pensions, and spending on social services. Time helpfully crunched the numbers to explain the Greek austerity measures to Americans. If the same cuts were imposed in the U.S. over the past few years, we would have seen the hourly minimum wage drop from $7.25 to $5.66, the average government worker’s annual salary decrease from $51,340 to $43,639, and the average senior citizen’s monthly check drop from $1,294 to$776.
So while the bailout money kept Greece afloat over the past five years, the larger scheme didn’t work. Greece was able to keep making payments to its creditors, but its overall financial situation continued to spiral downward. Its economy shrunk by a quarter in the past five years, one in four Greeks are unemployed, and as of 2013, 44 percent of Greeks were living below the povertyline.
Oh, man, I’m between jobs right now and I don’t do anything but play video games all day. Who came up with that bright idea?
At first the architects of the austerity measures predicted that Greece’s debt level was “sustainable,” but in 2013 the IMF admitted it made huge mistakes. In an internal report, the IMF concluded that its forecast was too optimistic and it underestimated the damage austerity measures would do to the nation’s economy. However, the bailouts prevented the Greek crisis from spreading to other EU countries, and the IMF said, “If we were in the same situation…we would have done the same thingagain.”
The Greeks must have been pissed.
Indeed. In January Greece elected the far-left party Syriza, with new prime minister Alex Tsipras promising to end the “vicious cycle of austerity” by renegotiating the terms of the bailout loans and reducing the nation’s debt. This made other European officials jittery, especially when Tsipras’s first act as prime minister was to visit a memorial for Greeks killed by the Nazis, “a gesture wreathed in symbolism for a man who rails against the German-led ‘occupation’ of his country,” as The Economist explained.
What’s their problem with Germany, specifically?
The Washington Post’s Anne Applebaum summed it upnicely:
Germany is the largest, richest, most dynamic economy in the euro zone. Its taxpayers support the European institutions that lend public money to Greece, and its banks owned much of Greece’s private debt, too. When the Germans declare that they will not allow Greece to change the terms of its bailout package, everybody listens.
Oof. Maybe they shouldn’t have brought up the Nazi thing?
It probably didn’t help. The new Greek government took a more confrontational tone and eased some reforms already in place, but after securing a five-month extension of its bailout program in February, Greece was forced to make numerous concessions in talks with its creditors. As the bailout’s June 30 expiration date approached, the European creditors offered another five-month, $13.4 billion extension and said Greece must accept over theweekend.
Instead, Tsipras made a bold and risky move: The next day he walked away from the talks and called for a referendum on Sunday, July 5, to let Greeks decide whether they should accept the terms of the bailout. “After five months of tough negotiations, our partners ended up with a proposal in the form of an ultimatum,” Tsipras said in a televised address, adding, “The goal of some of Greece’s partners is the humiliation of an entirenation.”
I don’t get it — wasn’t this Greek dude acting pretty rude for a guy begging for money?
Yes, but it’s more complex than that. Greece had a €1.5 billion payment to the IMF due days later, and Tsipras was hoping EU leaders would fold rather than risking a Greek default, and possible exit from the eurozone. But after years of stressing about the effects of Greece’s potential departure, EU leaders believe that the eurozone could survive a so-called“Grexit.”
Grexawhat?
Let’s look at it another way. Imagine you rack up thousands in credit card debt while you’re unemployed and living in your mom’s basem*nt. She pays off the interest but says you have to find a new job, start helping out around the house, and sell all your video games. After several months of fruitless job hunting, you crack. Next thing you know, there’s a PS4 on your credit card and you’re spending your days sitting around playing Arkham Knight. Then you ask for more money because debt collectors are going to start coming after you. But rather than paying, this time your mom says she’s going to have to cut you off completely and pulls your suitcase out of theattic.
That’s not fair! She knows my manager at Cinnabon was totally out to get me.
Relax, we’re talking about Europe, not your actual mom. The European Central bank said it wouldn’t extend the emergency loan program, and on June 30 Greece became the first developed country to miss a debt payment to theIMF.
Okay, but what happened to my PS4?
Nothing, it was a just a metaphor. Let’sfocus.
Sorry. So what’s Europe up to now?
Greek banks have been closed since last Monday, and ATM withdrawls have been limited to €60 a day. Greeks can still use credit and debit cards, but there have been long lines at ATMs, and many are anxious about whether they’ll have enough cash to buy thebasics.
Greece essentially defaulted on its payment to the IMF, but there were no immediate consequences aside from being mentioned in the same breath as Sudan, Somalia, Iraq, and Afghanistan. The country has asked for a third bailout, since the previous one expired on Tuesday, but Eurozone finance ministers said they wouldn’t make a decision until after Sunday’svote.
What were they voting on?
No one’s really sure. Greeks were originally supposed to decide whether they should accept the terms of an extension of the second bailout, but that proposal doesn’t exist anymore. Tsipras urged people to vote “no” to bolster his negotiating position, but European leaders said that would amount to a vote to leave the eurozone. Here’s how the New York Times described the decision the Greeksfaced:
Imagine the fate of your country hangs on a yes-or-no question. The question is drafted in cryptic, bureaucratic language and asks you to decide on an economic program that no longer exists. Leaders in neighboring countries are begging you to vote yes. Your government is begging you to vote no.
I vote “D) All of the above.”
That’s not … well, actually that’s kind of what the Greeks did. “No” won with61.31 percent of the vote, but many told journalists that they rejected the idea that it was a vote for exiting the eurozone (and in a poll last week 74 percent of Greeks said they wanted to keep using the euro). Prime Minister Tsipras praised voters for making a “very brave choice,” saying, “You gave me the power not to break away from Europe but to achieve an agreement with Europe that will take us away from austerity and bring us into a newera.”
So he won?
Sort of, but many European officials claim a deal is less likely now, and the situation is still dire. Greece is supposed to pay €3.5 billion to the European Central Bank on July 20 and Greek banks could collapse in the coming days. Former U.S. Treasury secretary Larry Summers wrote thisweekend:
The referendum is probably the second most important event of the week in Greece. However it turns out, Greek banks will run out of cash early in the week, probably on Monday. There will be an immediate need to either provide them with some sort of IOU scrip to meet demand for funds or to resolve them in some way, as Greece lacks the capacity to create Euro. What the Europeans do and the decisions the Greeks make will shape the future of Greece and the Euro area.
If Greece wants to print more money, it will have to revert to thedrachma.
So what happens if Greece stops using euros?
Analysts say that if Greeks exit the eurozone they could see a 40 percent drop in their purchasing power, and goods may even have to be rationed. Initially, the Greek people would be in a more painful situation, but over time they may have a better shot at recovery. “There is no modern parallel,” Michael P. Dooley, professor of economics at University of California, Santa Cruz, told the Times. “That’s one of the reasons why there is so much hesitation to do it; no one really knows what will happen.” They could also wind up leaving the 28-nation European Unionaltogether.
Is that actually going to happen?
Maybe! Analysts are giving the eurozone exit anywhere from 40 percent to 80 percent probability. European officials have several meetings planned over the coming days, and this week will likely decide the fate of Greece and theeurozone.
Okay, how about I just keep playing Arkham Knight, and you let me know when you figure out if Europe still exists.
Deal.
This post was updated throughout following Sunday’sreferendum.
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