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 MMT economist or follower of MMT economists 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 citizensvote on the deal. European 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 andhis 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.
Cross Posted From Our Dime.
Much of this analysis is based on Modern Monetary Theory (MMT). It's a (relatively) new "Post-Keynesian" economic school of thought. If you're interested in learning more, please follow our group, Money and Public Purpose. Also, there is a small, but growing MMT wiki that is worth checking out. I'm also cross posting this on my own MMT centric blog.