Can Civilization’s Birthplace Become Its Funeral Pyre?

Overreaching headlines aside, the Eurozone is a bit of trouble. Greece has been bailed out in an attempt to avoid a sovereign default. Those in the know think the Greeks are unlikely to be the last country in the Eurozone to require a bailout and the conditions the IMF are expecting Greece to conform with are likely to have unintended far-reaching consequences that we can’t possibly understand at this point. A lot of people I talk to seem to be of the opinion that the Greeks got themselves into this mess and that bailing them out serves little purpose. This is probably true though for reasons far more complicated than that.

A guest post over at Naked Capitalism outlines 11 points supporting the idea that the Eurozone will likely break down over the Greece bailout. One of the key points revolves around a basic accounting principle: if one entity has a deficit, some other entity must have a surplus. Fiscal accounting is essentially a zero sum game and this is very important in the Greek case. When thinking about this, it’s important to realize that Greece, being a member of the EU, does not control its own sovereign currency. Thus, for Greece to run a deficit, there had to have been complicity from within the EU, specifically from Germany. It’s the fiscally conservative Germans benefiting from their strong export driven economy who provide the opportunity for the Greek government to run a deficit.

This part about sovereign currency is important. Historically, countries that control their own currency have been able to inflate their way out of debt, at least to some degree. In Greece’s case, the country is unable to do this because their currency is the euro and is outside their control. Therefore, they essentially have two options: default or bailout and accept the draconian retrenchment terms the IMF is demanding. As the article above mentions, it is unlikely that these terms are created with the considerations necessary regarding the simple accounting fact above, e.g. if Greece successfully imposes financial austerity measures on its people (a HUGE if at this point, one that isn’t getting enough attention), this necessarily means that the export societies of Germany and other Eurozone countries will retract due to the cutbacks in spending in Greece and others.

On top of that, these austerity measures will likely have a deflationary effect on the Eurozone. The bailout of Greece is aimed at government debt and the austerity measures are aimed in the same direction. Based on the same simple accounting concept I talked about above, if Greek government debt obligations are reduced through austerity measures, the Greek private sector will see their debt obligations grow leading to more private defaults and less growth in the Greek economy. Shortsightedly demanding to lower government debt with no consideration of the interconnectedness of the government and private sector spending will lead to further pullbacks and lack of growth in Greece.

In the end, the issues that we are seeing with Greece and the like illustrates several problems with the Eurozone as it is currently existing. If the Eurozone collapses, as the article seems to think possible, the ramifications will spread out over a much bigger area than just Europe. My crystal ball is cloudy when it comes to the results of a Eurozone collapse but I can’t help but think it will be highly detrimental to our country as well. We should watch carefully how things play out in Europe since it’s quite possible we may have to deal with similar circumstances in the near future here at home as profligate states like California begin to encounter the same issues the Greeks are running into.

One comment on “Can Civilization’s Birthplace Become Its Funeral Pyre?

  1. i have to admit to both ignorance and hubris at this moment. i both do not understand the issue at hand fully and yet would claim that those claiming to have wisdom about it are fools.

    greece is in a heap of trouble; on this we can all agree. but greece’s running a deficit, at least from my perspective, does not mean anyone else must necessarily be running a profit. let me explain.

    the world economy, however intricate and through whatever rationalizations, operates fully within an artificial construct at this point. in the absence of anything to back up wealth concretely, the world economy is reduced to nothing more than theoretical numbers. there has been so much talk about the world economy expanding and contracting, but think about it: relative to what? it’s the fucking world. there is no relative measure. and there can be no absolute measure, because the ruler is always going to be theoretical.

    that established (at least in my admittedly somewhat scotch-addled brain, with a hat-tip to the site itself and a hearty thanks to the boys at lagavulin), the very idea of accounting equalization can be called into question. just like entropy can contract within a subsystem without violating the second law of thermodynamics due to the macrosystem’s existence, so can greece run a deficit without anyone running a profit. in fact, it is theoretically possible for the books not to balance at all because a debt has been incurred against a historical balance that never actually existed. the world economy expanded beyond what it should have, and now balaces are owed, but to whom? the books do not necessarily need to balance. after a while, one begins to wonder who owes whom since no one actually owned anything in the first damn place.

    sometimes it’s all just numbers, and we are deluding ourselves and perpetuating a dangerous myth to suggest otherwise and behave accordingly.

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