Euro Zone Debt Crisis Was Going to Happen Eventually

The European Union was set up in a manner that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation does in the Eurozone does not issue it’s own money.  It must be borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.

During an economic bust – or recession – people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren’t supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.

During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back… it’s only going to make the recession worse!

Even if Greece perfectly managed their finances and economy, this would’ve just happened to another euro zone country.  Greece just happened to be first.  MMT economists predicted this would happen several times over the years(See here, here, and here and again here).

Governments must be able to counter act recessions.  The Euro was designed without thinking about recessions.

Greek Week Rush – Analyzing the Euro Crisis

A lot of news over the weekend on the Euro ‘crisis’.  As I write this, but before I publish it – Greece may even have a new government.  That’s how quickly things are changing.  Because of all the news, I’m pretty sure all my posts this week are going to concentrate on Greece, the Euro, and the Modern Monetary Theory(MMT) economic approach to understanding what is happening.  Note that I do not call it the Greek crisis.  It is a crisis of the European Union and the single Euro currency.

First, a brief overview of the problem and the dealings.  The European Union, when it switched from all having independent currencies to the Euro, it required all participating countries to have(among other things) a budget deficit that was less than 3% of gdp and total debt less than 60% of gdp.  For example, if a country has a trillion euro economy, its budget deficit can only be 30 billion euros, and it’s total deficit 600 billion euros.  If a country violates those numbers, it must come up with an economic plan to resolve the issue and it was subject to fines by the European Central Bank – yes, even for Sovereign governments banks punish you for not having money by charging you more money.  As you can imagine, this eventually caused some problems.

The first problem to come up was, what to do about recessions and economic downturns.  France and Germany learned about this problem in 2003, when their recessions put them in violation of the 3% rule and made it difficult to deficit spend out of their economic crisis.  The treaty was changed so that fines could be postponed on defaulting countries as long as they submitted a reasonable plan to get back under the deficit requirements.  It is under this agreement that the other countries can force Greece into these so-called “bail-out” packages.  Greece is in violation of the debt and deficit rules so it must come up with these plans to implement economic suicide austerity and other nations must approve it or Greece will face fines and penalties.

Within the last couple years, the rest of Europe has imposed several austerity programs on Greece one after another.  Each of the plans has resulted in massive economic hardship for Greece.  In addition, Greece continues to find itself unable to reverse it’s budget deficits.  Any economist or follower of MMT could tell you why.  Hell, anyone who took a 3 hour course in Keynesian macroeconomics could tell you why the austerity budgets didn’t work.  When you raise taxes and cut government services you put millions out of work.  Those who still have work get freaked out and raise their savings rate in they case they get layed off next – business cut back because consumers aren’t buying and lay people off.  The newly unemployed don’t pay taxes and instead collect unemployment.  At the end of the day, all your “austerity” budget accomplishes is a few more unemployed.  But… I digress.

These so-called Sovereign debt crisis has made Europe tense.  Last week made these really tense.  Last week it appeared that Greece made a deal with the rest of Europe to eliminate some of its debt.  In exchange Greece had to agree to (surprise, surprise!) more austerity.  Knowing that this was unpopular, the Prime Minister was going to have Greek citizens vote on the dealEuropean leaders freaked out.  They said, “You mean you’re going to let your people choose between being debt slaves or not?  You can’t do that, you must force it upon them”(Note: Not actual quote, but you get the idea).  The Prime minister reversed himself.  Instead, he was going to try to get it through Greek Parliament.    Unfortunately for him, it appears that the deal isn’t very popular in parliament either and his whole government appears to be on the verge of being toppled.  This all happened between last weekend and this morning.  A “this just in” is that they may have just approved the bailout and formed an interim government with the existing prime minister still at the head of it.

Well, that’s where things stand.  Coming up this week I’ll go over the MMT analysis of why this debt crisis was inevitable, why this latest deal won’t make it go away, why it’ll happen to other countries in the Euro, and options for Greece and Europe to prevent it in the future.


The Dilemma Faced by Greek Citizens: How to Vote?

Last week it appeared that a bailout deal between Greece and the rest of the EU was going to go through.   However, it seems that the prime minister of Greece is going to quite literally, “let the people decide“.  Now, the Greek people must decide if they want to vote for the bailout – which requires them to raise taxes and cut government services, or against the bailout which would cause them to default on their loans.  If the default on their loans, they won’t be able to deficit spend Euros anymore and will have to, in response… raise taxes and cut government services.  That is quite a dilemma for Greek Citizens.

If I were a Greek Citizen, I would vote ‘No’.  The reason is that there are other options.  If the Greek government cared more about their citizens then about foreign and domestic bankers, they would research those alternatives.  Those alternatives would give Greeks what they seem to want.  A more leisurely lifestyle – even if it’s ‘poorer’.  There is nothing wrong with wanting that and no reason they can’t have it.

One of the alternatives is the so-called Mosler bond.

turn the bonds it buys into Mosler bonds, by requiring the govt of issue to legally state that in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the govt of issue.

That would allow Greece to continue borrowing and spending on demand and at will.

Another alternatives is one that, for some reason, seems to be way outside the policy discussion.  Greece could just drop out of the EU, and convert all debts back to a Sovereign currency like their original drachma.  Once they’re monetarily sovereign they will never again have to worry about government default.  They will be like most of the world in that the only limit on spending will be inflation.  If Greeks want a leisurely lifestyle and don’t mind having a week currency, they could go back to full employment for those who want employment.

Unfortunately, neither of these options seem to be seriously discussed even though it would give Greek citizens what they desire.  That is why I would vote no against this deal.  Vote it down, and force the government to seek alternatives.

Some, like Warren Mosler himself, would encourage Greece to vote yes.  His reasoning is very logical.  If you vote for the bailout, you can continue borrowing and only have to accept some cuts and small tax rise.  If the vote is no and you default and cannot continue borrowing, then you will have to cut even more spending and raise taxes even more.

In the end, it comes down to politics.  Mosler’s position is very pragmatic.  Vote for the bailout because it’s not as bad as default.  My position is very political.  Vote it down and force the Greek government to find an alternative solution.