The impending debt crisis that could wreak havoc on the global economy…and I’m not talking about the United States. Last week Greece defaulted on its debt payment to the IMF, triggering international markets to momentarily freeze to see what Greece will do next. But how did Greece get into this mess? It’s quite complicated and this explanation is far from comprehensive. However, if you take nothing else away, note that the Greek debt crisis is in no way, shape, or form even remotely similar to the “debt crisis” in the United States.
Greece is a country that has had a history of economic crises. They have a poorly written tax codes that makes it virtually impossible for them to collect taxes from Greek citizens. They have an unbelievable 89% of tax receipts that are uncollected. That is, 89% of the tax money the government should be collecting, they aren’t. Because the government was consistently seeing shortfalls in the money supply, they would simply print more money. As you can guess, this simply led to inflation and the devaluation of their currency.
In 2001, Greece joined the Euro zone, in hopes of alleviating the country of its hyper-inflated currency. With a new currency, Greece saw an immediate improvement in their economic situation. The economy exploded as Greece took out loans from the European Union at dirt cheap interest rates because of the new currency being valued higher. There is just one problem…they never rewrote the tax codes. After several years of unprecedented growth, 2008 saw a crash. Greece began to accumulate unbelievable debts on loans that they were struggling to pay back because of the lack of tax returns. This time, because they couldn’t print more money—the euro supply is controlled by the European Central bank—the economy collapsed. Unemployment soared to 28% and Greece was in a full-blown depression.
In an attempt to help alleviate the Greek debt crisis, the Troika—a combination of the International Monetary Fund, The European Central Bank, and the European Commission—began issuing loans to Greece on the basis of what we call austerity: steep spending cuts, wage cuts, and tax increases. After two rounds of loans from the Troika, Greece’s economy improved very little. The austerity measures did nothing to help the people of Greece. They simply helped Greece pay off the previous international loans that they had been taking at record low interest rates. Now with the IMF demanding repayment on THESE loans, Greece has defaulted on them. The tax code is still in shambles. Unemployment is still at 25%. Greece is still forced to make austerity cuts. The situation is grim to say the least.
So now that we’ve set the background for what has happened, let’s look at what’s going on now. The ECB and the EU have offered yet another round of austerity loans. They have demanded that pensions be cut, and that wages be cut even further, directly affecting any civil service worker, such as military members. These wage cuts spread into the private sector as well, as the government attempts to raise even more taxes. On Sunday, the Greek people went to the ballot box to vote on whether another round of austerity measures should be accepted, and was soundly defeated. Now the markets stand in limbo to see what happens next.
Let me be clear about this, Greece SHOULD remain the euro zone. However, the EU needs to offer a bailout that doesn’t require austerity cuts. Instead, they should work closely with Greece to reform their tax codes, ensuring that ALL Greeks are paying their fair share. Much like the graduated tax system in the United States, Greece has a six-layered tax system. The top layer, where the wealthiest Greeks fall, pays zero taxes. This must change. Greece has already agreed to tax reform, but the EU must work to help them.
And if they don’t? Greece may be forced to leave the euro zone. While this is certainly a worst-case scenario, Greece would be forced to create yet another new currency and attempt to pay its debts off. This could have a domino effect on economies across the globe, including the United States. The loss of Greece from the EU would cause other countries to begin questioning its self-governance. If the EU can’t govern the countries within it, countries will begin pulling back from investing. Banks in countries such as Portugal and Spain who purchase EU bonds would stop, causing the euro to drop. The United States, who is equally invested, would then start losing money in its bond investments, and would immediately begin trying to sell off their bonds. Wall Street banks would feel a crunch and the market would begin to fall.
Because of this, Europe must work to help Greece. The biggest two goals for the EU and Greece should be rewriting Greece’s tax codes to force all Greeks, including the wealthiest who have had an exemption for far too long, to pay their fair share, and reallocating their budget investments so that Greece is using their funds to help reduce the unemployment rate and improving their economy. If these two things are met, Greece’s economy can finally take off on a sustainable path, allowing the euro zone strengthen itself with a productive Greece on board. Then the IMF should consider partial forgiveness of Greece’s debts to ensure that we don’t end up with yet another Greek crisis five years down the road.