At this point, everyone knows that Greece is in trouble: its finances are the stuff of budget officer nightmares, and its political intransigence has left the impression on the leaders of the European Union that maybe Greece needs to be "set free" from the Euro. But as this mess threatens to become irreparable, I feel it is necessary to point out that Greece does not actually bear sole responsibility for its current predicament.
In order to understand how Greece has become the international whipping boy for bad budgeting, one must understand three things about the EU and its currency. First, the EU was born out of what amounts to the European version of NAFTA: certain countries' economies, particularly France, West Germany, and friends, interacted so often it was seen as advantageous to simply set up a third party to regulate and assist trade.
Second, since all these countries were trading constantly, it was easier to simply set all the national currencies to a single benchmark, which happened to be Germany's Deutsche Mark. But there was a catch: as Germans are wont, their central bank demanded very strict rules stating that only low rates of inflation be allowed. This forced the other countries to become more fiscally austere, but since they had strong, diverse economies they were able to adapt.
And third, when this economic co-operative became the supra-national organization that is the EU today, politics trumped central bankers' math and warnings. Even though certain country's economies were neither strong enough, nor their government's fiscal enough (i.e. Spain, Italy, Portugal, and Greece), to gain real advantages from joining a single currency, bringing more members into the hugfest at Brussels was deemed a higher priority regardless of reality.
Now to answer the sophomore's question - why does any of this stuff matter? Well when you don't have a national currency, you can't print more of it to make your goods cheaper to buy or your debt worth less. And when your country's economy is not very diverse, or it doesn't have a high demand item fueling it, such as oil, automobiles, or digital gadgets, then slings and arrows of market misfortune hurt even more.
Further to this, if your government splurges on public services while simultaneously gathering very little revenue and stymieing legal business ventures through overregulation, it doesn't take an economic whizkid to see things aren't gonna work out.
But if you've been paying attention, there's an obvious question to ask: despite all these bad behaviors and political missteps, Greece still needed to get money from somewhere, as it couldn't just print more. So who lent it to them?
The answer isn't simple, as Greece's bonds are held by several investors all over the world. But the fact remains that prior to the 2008 financial crisis, a great deal of the Greek government's debt was borrowed from German banks.
To be clear, I don't begrudge German banks for lending Greece money - that's the business they're in. And while it is ironic that the same country that argued for austerity before Greece's entrance and after its meltdown is significantly more responsible for the current Greek drama than it cares to acknowledge, we can't change what has already happened.
But what I do take issue with is the fact that the German lending of pre-2008 and now the German tongue-lashing of post-2008 has failed to answer the fundamental problem: Greece's lack of growth.
The loans built out of German pensioners' savings were not put up as venture capital for ways to get real growth in the form of factories or call centres built or run in Greece. They were put up for immediate gain via interest on government debt with a pathetically predictable long term result. In fact, the joke is that the pathetic greed of a few short-sighted bankers has actually thrown all of Europe into existential crisis, as old rivalries and recriminations begin to resurface.
As at the beginning of the Euro Crisis, the European Union and its stronger member states have a fundamental choice to make about how its monetary component functions in relation to regional economies. Either, a mandate is put forward to foster real, sustainable growth in its less robust member states' economies, or the single currency must be withdrawn to those members whose exports fit a starting exchange rate of $1.30 Canadian ( $1.41 as of Monday).
The European Union's "citizens" have had enough. After over five years of dithering, elections, referendums, and posturing, people of every member nation and stripe are demanding results. I sincerely hope that Merkel, Tsipras, and all the rest find a way out of this mess, but any solutions must make use of that old axiom of economics: either a business grows or it dies.
