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The Greek Debt Crisis: What’s Going on in Europe?

Research & Commentary
October 27, 2011

by Salvatore Babones

As the economic news in the United States gets worse and worse every week, a lot of Americans are saying “at least we’re not Europe.”  To read the press accounts, it sounds like Greece is plunging Europe into a second Great Depression.  Greece is having trouble paying its debts, and many people are worried that the Greek debt crisis might cause a collapse of the entire European banking system.  Just what is going on in Europe?

What’s going on in Europe is: not much, really.  Greece makes up less than 2% of the European Union’s combined national income.  The German economy could eat 10 Greeces for breakfast and still have room left over to eat Finland for lunch.  The problems of the Greek economy are only a big deal because a few politically powerful European banks made investments that they now regret.

[pullquote]The German economy could eat 10 Greeces for breakfast and still have room left over to eat Finland for lunch.[/pullquote]

Not just banks, but hedge funds.  So-called “vulture” funds have bought up troubled Greek bonds at a big discount.  These hedge funds are now using their powerful political connections to lobby for full payment of Greece’s debt.  In other words, these vulture hedge funds have bought Greek bonds at 25 cents on the dollar but are pushing for full payment.

They’re not going to get full payment.  For months, the European Central Bank was talking about paying off 40% of the bonds’ face values.  Today they agreed to pay 50%.  That’s not a bad deal for the vulture funds: buy at 25 cents, sell to the ECB at 50 cents, take home a 100% return for a few months’ investment.

It was reported in June that the French (it’s always the French, isn’t it?) floated the idea of just having the ECB buy back the bonds on the open market — that is, at 25 cents on the dollar — but the banks and hedge funds would have none of that.  The French proposal was quickly shouted down.  Full payment is the demand; wring your hands, talk a lot, and pay 50 cents is the current agreement on what will actually happen.

And the banks and hedge funds are still pushing for at least a few more pennies.

Well, does it really matter if the banks squeeze a few extra pennies (or Euro-cents) out of the European Central Bank?  Sure it does.  It matters because the ECB isn’t going to just give Greece the money.  The ECB is going to lend Greece the money.  The ECB will lend the money to Greece, and Greece will use the money to pay its creditors.

If that were the end of the story, it would seem fair enough.  Greece gets a sweet deal on its debt repayments, the vulture funds get a sweet profit on their investments, and the ECB picks up the difference.  The Greek debt crisis is over.  But that’s not the end of the story.  The ECB is placing conditions on its bailout.  Not conditions on the vulture funds (of course not); conditions on Greece.

The Greek government is being forced to raise sales taxes on the goods that ordinary people buy, but has been warned not to raise income or investment taxes on the rich.  Government employees are having their salaries and pensions cut.  People are being forced to work longer and retire later.  And the government has been ordered to sell off state-owned companies.

The result has been a worsening of the recession in Greece, which has made the Greek debt crisis even worse.  People are struggling to pay higher taxes on lower salaries.  Worse, the fire-sale privatizations of state services are almost certain to benefit rich oligarchs and foreign companies who can sweep in to buy these assets at artificially low prices.  Look for a massive increase in inequality in Greece over the next few years.

[pullquote]Look for a massive increase in inequality in Greece over the next few years.[/pullquote]

The Greek economy is a mess.  Everyone agrees on that.  For years, Greece has had a problem with massive tax evasion and manipulated economic statistics.  One need have no sympathy for the doctors, layers, and accountants (!) who complain that the government is finally auditing them to make them pay their taxes.  But these problems have not been caused by ordinary Greek workers.  Ordinary workers have their taxes taken directly out of their paychecks.

A pro-worker solution to the Greek debt crisis would come in two parts.  First, force those who have long evaded their taxes to start paying them.  Millionaire shipowners, corporate executives, and highly-paid professionals should be the target.  Second, let Greece reimburse bondholders the amounts they actually paid for their bonds.  Then Greece could retire its debt in dignity instead of through begging from the ECB.

For all Europeans may worry (and they’re good at worrying), the European economy is in far better shape than ours.  Personal debt levels are much lower in Europe.  And Europe as a whole exports almost exactly as much as it imports, while the US has a massive trade deficit.

Europe has its problems.  Every part of the world does.  But even though Europeans are always more pessimistic than Americans, Europe’s problem are actually much smaller.  In relative terms, the Greek debt crisis is to Europe what the Arizona debt crisis is to the United States.  Bad, but hardly catastrophic.  Europe will survive.  Let’s just hope it doesn’t feed Greece to the vultures.

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