Greece: Philosophize This

          The Mediterranean Sea -- a body of water that facilitates trade between Europe, the Middle East, and Africa -- has metaphorically gone from an innocuous, inanimate, watery manifestation to an insidious, infectious, transporter of insurmountable debt and fiscal insolvency.  It has washed up on the shores on Greece, Spain, and Italy with a categorical disregard for fiscal frugality and parsimony.  It ransacked balance sheets, GDP, and moreover, the faith of constituents in the government to properly spend within their means.  But unlike Italy and Spain, Greece did not just drink the debt poison, they chugged it, and a prolonged cold turned into the bubonic plague for the progenitor of democracy and western thought. 

            In order to understand and ascertain the inscrutable sovereign debt crisis that is mutilating the continent of Europe, one must first pose the question, “Why would countries collectively band together and be monetarily united, but remain fiscally autonomous?”  The answer lies within the heart of Europe’s tumultuous history: In order to prevent another catastrophic war, countries would band together economically to thwart another prospect of war, but because of their perpetual propensity to distrust one another, they wanted to protect their own fiscal autonomy, so they compromised.  Subsequently, twenty-seven countries fused their fiat currencies into one potent currency entitled the “Euro”.  This audacious confederation was unprecedented and became a prospective template for other nations seeking to augment their own currency and economic clout. 

            Unfortunately, the archaic adage, “All good things must come to an end,” still holds true.  The fundamental problem with the quasi-union is that it was just that – it was a makeshift attempt to try and solve a problem of the human condition that outright ignored the conspicuous idiosyncrasies of the countries involved.  Furthermore, the quasi-union failed to address the inherent incentives to cheat when individual entities are asked to produce a group product.  For example, one of the reasons there are so few cartels in existence is because there is an incentive to cheat the other parties and raise output to gain extra profit.  In summation, collectivist actions exemplify the problematic disconnect between theory and reality: if it sounds too good to be true, it always is. 

            Hindsight is 20/20 and there are numerous other causal factors to consider when examining the European Union’s problems, but for brevity let’s narrow the scope of this discussion to why Greece became a ward of the international community and will inevitably default.  In addition to answering those questions, let us also establish why we should care if Greek defaults and why we should not care when they cry about it. 

            For 2011, Greece had a Debt-to-GDP ratio of 164% and the IMF believes that number will shrink down to 129% by 2020.  Our intuition would tell us that this mitigation is reasonable, but numbers without context are moot.  Currently, the world’s 8^th largest economy, Italy, has a Debt-to-GDP ratio around 120% and an analyst at CNBC remarked starkly, “too big to fail, too big to save.”  So let’s put two and two together: Analysts are already having a tough time swallowing Italy’s debt problems at 120%, and Greece is only going to shrink to 129% by 2020.  That means 8 years from now, and after a series of bailouts, Greece will still be in what some call the “danger zone” and facing problems tantamount to Italy’s.  Moreover, Greece has currently been in a recession for 5 years, is facing an appalling 20.9% unemployment rate (for the ages 15-24 it is 35.6%), and their own politicians have expressed concerns about staying true to the austerity measures they signed off to in order to receive the bailout funds.  (Greek elections are scheduled to take place in April.)  Also, keep in mind that Greece still has to use an overvalued Euro relative to their economy and this will severely restrict any growth possibilities and further burden the downtrodden country.     

            Remember Lehman Brothers and Bear Stearns?  Of course you don’t, because they don’t exist anymore.  One was bought out and the other went bankrupt during our domestic financial crisis.  The difference between Greece and an investment bank is that it is a sovereign and it cannot be bought out, consequently, leaving one of two options: default or bailout.  Because Greece is a part of the European Union, neither option is preferable.  A bailout would take funds from taxpayers all over the EU and give them to a country that one does not deserve it and two that will not be able to pay it back.  The sentiments of the German people accentuate this point: 80% of Germany opposed the bailout, although the Bundestag voted 496-90 in approval.  A default, on the other hand, would trigger the unfathomable: the debt contagion would infect the world and the credit default swaps market would go sporadic.  (Credit default swaps are essentially insurance on securities incase of default.)  Our global financial system is a messy web of intertwined investments and hedges, so just as when Lehman collapsed, a Greek collapse would send pernicious vibrations throughout the market.  Thus, you should care if and when the Greeks default on their unsustainable debt.  Your parent’s pensions funds, mutual funds, etc. are all going to be affected because our domestic financial system is exposed to Greece and the peripheral debt-stricken countries.  Once one comes crashing down, expect others to follow suit.  

            In regards to the bailouts that are taking place, there are multiple problems associated with such “solutions”.  First, it leads to a slippery slope because once Greece is given funds, the other countries are going to looking for a handout as well, and there is not enough money to go around for that to happen.  Second, given the aforementioned economic conditions, giving Greece money is like handing over your portfolio to the E-Trade baby to manage – in essence, it’s a losing proposition.  To explain metaphorically, it is like a ticking time bomb with a quarter slot.  The more quarters you put in it, the more time it adds onto the timer before it explodes.  But eventually, there will be no more quarters to put in it, and the bomb will explode.  So why would be waste our money on merely delaying the inevitable?  Would we ever spend millions on a terminally ill patient?  Would we buy them life insurance?  No, and the same logic is applicable to trying to bailout Greece.

            Invariably, Greece will default and we will all be upset with the subsequent repercussions.  The Greeks themselves will be the worst off, as they will have a very difficult time trying to borrow money to finance governmental operations.  But this natural free market punishment is exactly what they need to correct their gluttonous behavior.  Examples of such wanton behavior include but are not limited to: Honesty-based machines for their state-of-the-art subway system in Athens, an incomprehensible bankrupt railroad system, wages of the public sector have doubled over the past decade, more than 600 professions are allowed to retire at age 50 (and that includes a 95% pension plan of their last year’s working salary), only 0.0004% of the country admits to earning more than 90,000 euros (since they are allowed to state their own earnings for tax purposes and it rarely, if ever, is challenged or questioned), and more than 60,000 homes in Greece are reported to have investments worth more than 1,000,000 euros.  Essentially Greece is, as one economist succinctly put it, “A poor country full of rich people.” 

            In summation, Greece was irresponsible – think along the lines of Billy Madison – and because of their disregard for fiscal frugality, deserves to temporarily suffer so they can learn from their mistakes.  No one, or for that matter no country, is impervious to paying their bills.  When you consume you, must produce and spend what you can afford in order for there to be economic equilibrium.  We know you cannot frivolously use your credit card on 5^th Avenue and not expect creditors to come knocking asking for their money.  Furthermore, we understand that it is categorically egregious when someone retroactively changes a covenant so they do not have to honor their previous agreement.  (Greece coerced bondholders to take a “haircut” on their payments and only received about half of what they should have through what the Greeks called a “voluntary agreement”.)  Unfortunately, Greece cannot make a Trojan Horse this time to solve their problems.  They must pay their dues and do it with dignity.  With that being said, I also understand that not too far down the road our own debt battle will be fought and we will have to swallow down austerity with a Cheshire smile.