It would be Europe’s worst nightmare: after weeks of rumors, the Greek prime minister announces late on a Saturday night that the country will abandon the euro currency and return to the drachma.
Instead of business as usual on Monday morning, lines of angry Greeks form at the shuttered doors of the country’s banks, trying to get at their frozen deposits. The drachma’s value plummets more than 60 percent against the euro, and prices soar at the few shops willing to open.
Soon, the country’s international credit lines are cut after Greece, as part of the prime minister’s move, defaults on its debt.
As the country descends into chaos, the military seizes control of the government.
This scary chain of events might never come to pass. But the danger that Greece or some other deeply damaged country in the euro zone could leave the single-currency union can no longer be ruled out.
In this age where the Fed is the largest single holder of Federal Government debt, and new dollars are created for Treasury to spend by an entry on a spreadsheet, I think more immediate question for Americans is “what would happen if the world drops the dollar?”
That would be hilarious: the Chinese would discover that the money that they’ve labored for for decades, providing us with shiny toys, towards which they’ve massacred tens of millions of their own people in various reforms, is worthless. Not terribly likely: anyone that owns dollars can’t afford to do anything that would lessen the demand for them, which includes selling them.
I learnt today, from Prime Minister’s Questions, that the UK has lent Ireland 5 Billion Euros; not 5 million, or 50 million, but 5 Billion, which presumably we borrowed in order to do so. Meanwhile we put a wrecker’s ball through our new £9 billion AWACS aircraft just on the point of delivery. Still, I suppose things could have been worse and they could have run out of fuel over Iran. Our money however will not go to waste, as the Irish have announced that they are making loans of 1.3 billion Euros available together with government incentives to enable Irish people to buy houses; isn’t that nice of us?
And the Greeks? Well, if they go for the chop, so do the Balkans which they trade with and finance.
Here is an interesting graphic from the BBC. Mad old world.
Greece’s best option is absolutely miserable, and the others get worse from there. Greece has a population about the size of Ohio or Ontario. Current government deficits are about 15% of GDP, even after cuts. The economy is so utterly dependent upon deficit spending by the government that each round of cuts drives the GDP that much farther into the ground, which decreases government revenues. Necessitating more cuts. Lather. Rinse. Repeat.
Greece’s balance-of-trade deficit is also about 10% of GDP — compared to about 4% for the US — and more importantly, most of that trade is in Euros, the value of which they cannot diminish in order to make their few exports more competitive in world markets. Unless the Greeks can double the efficiency of their olive and olive oil production (which they cannot), they are in terrible trouble, given that their imports are three times their exports.
Greek labor costs are going to have to fall by a lot — roughly half — which will trigger massive social unrest, and not just from the unions and government workers. Greece will also have to default on its debt, the sooner the better.
Greece would have a terrible time leaving the Euro since all their contracts are in that currency. The litigation would last for decades and the legal bills would be astounding.
Meantime the Germans are saying “You have to become like us.” which the Greeks quite simply cannot do, if only because they have a largely pastoral economy on miserable, rocky land. Any way you look at it, Greece’s [i]BEST[/i] possible outcome is a terribly long and deep depression. It will not be pretty.
They have an economy based on shipping and the Mediterranean and they have declined to tax shipping. They have also handed out ridiculous pensions, letting people retire at 50 and calling housekeeping “hazardous work”.
They need to tax shipping, and slash pensions.
The reason business will not locate in Greece is because of their stupid regulation and worker contracts. Those need to go too. Greece can work for a living it prefers to live off Germany’s labor.
Greece exports total 12.5 billion dollars of manufactured goods, fuels, food and beverages to countries such as Germany, Italy, UK, France and the US. (A debased drachma would help their exports)
The imports of the country are higher (around 28 billion dollars); they consist in manufactured goods, foodstuffs, fuels and chemicals. Its imports partners are Italy, Germany, France, UK, Netherlands and US. (It will need to cut back on these with a debased drachma).
Greece has a mixed capitalistic economy with a large public sector that accounts about half of GDP and that is blamed for the slow economic growth…
It is an agricultural country (with agricultural products such as wheat, corn, barley, sugar beets, olives, tomatoes, tobacco, potatoes, beef, dairy products and wine) with 20 % of the workforce employed in this sector. 59 % of the workforce is employed in the sector of services and the 21 % in the sector of industry (food and tobacco processing, textiles, chemicals, metal products, mining and petroleum) and construction. Even if Greece is an agricultural country, the agricultural contribution to the economy is only of 15 %.
The industry which contributes the most to the economy is the tourism industry and the shipping. Greece welcomes every year a number of tourists greater than the country’s total population and its shipping sector is the most important in the world.
(from wiki)