Photo by Aimee GieseWhat the heck is happening in Greece? If you flipped past any of the cable news channels last week, chances are you caught a glimpse of the protests. Likewise, if you watched the stock market tumble last week, chances are you heard about Europe's financial woes led by Greece, "the problem child of the European financial world."
Greece has accumulated massive debt, and the bailout being assembled by other EU countries totals 110 billion euros, or $140 billion dollars. Why are they doing it? To save their common currency.
This financial disaster has been brewing for years. Greece is among a group of four EU member countries -- christened the PIGS (Portugal, Ireland, Greece, and Spain) -- with "heavy levels of debt, which have proved a drag on the euro." Greece barely "managed to qualify for entry into the currency union" and only did so by including "the black market and prostitution in economic output."
Put another way, Greece was like a drug dealer who worked at McDonald's, but who bought an Escalade by including his drug profits as legitimate income on the credit app.
With a solid currency backing it, Greece took full advantage of its borrowing power and ran up the national debt through deficit spending. Greece's "total economic output is worth about $340 billion a year, but its current debt is $375 billion." Furthermore, "60 percent of Greece’s exports are sold in Europe" -- in other words, to countries that also deal in euros. Selling to them won't make the euro go any further in Greece.
As in the US financial crisis, also brought about by the lack of fiscal discipline, a bailout -- an infusion of capital, a do-over -- is the only feasible short-term solution. Greece can't bail itself out; other countries must do it for them.
Such steps come with conditions; hence, the protests. Spending cuts, higher taxes, and an increase in the retirement age were part of the austerity bill passed by Greek Parliament last Thursday.
What's next? Assuming Greece doesn't default on its debts (which it still could; the bailout and austerity measures don't guarantee Greece's financial solvency), the other EU member countries need to take steps to reduce their national debt. Spending cuts and higher taxes will slow economic growth, and Europe won't import as many goods, which means the US and Asia won't export as many goods. In short, there will be a global impact.
Personally, I'd love to go stimulate Greece's economy firsthand. It's a beautiful country filled with historical riches, friendly people, and delicious food and drink. It's just not very adept at pulling tight its purse strings.