Prime Junta
RPGCodex' Little BRO
- Joined
- October 19, 2006
- Messages
- 8,540
Well well. S&P just downgraded Greek government bonds to junk status, which means that many institutional investors can't by them anymore. Yields jumped to 15% and more.
Put another way, the Greek government just drove off a cliff. They're deeply, deeply in debt, and with costs like that, they have no way to service it. This means one of two things: default or a very expensive bailout by the Eurozone big economies.
Both are bad news.
Default would wreck the Greek economy even worse than it's wrecked now. It's also stuck between a rock and a hard place: to get back on its feet, it badly needs to devalue, but it can't, because it has the euro. OTOH it can't give up the euro, simply because the logistics of that operation are so fiendishly complicated that it can't afford to. That can mean only one thing: deflation. Deflation means a protracted period -- say, three years at an absolute minimum, and could easily be 10, 20 years or even more -- of very high unemployment, falling wages, falling prices, and a dramatically falling standard of living.
A bailout, OTOH, is incredibly unpopular among the countries who could afford it, in particular the Germans and the French -- they're not at all happy about throwing money at Greece, especially as their wrecked economy is largely due to dishonest dealing by their government. However, if they *don't* bail Greece out and allow it to go into default, it'll drive up interest rates all over Europe, and may well cause the next dominos to fall -- Portugal, Spain, Ireland, and Italy aren't doing too great either, and Spain and Italy are pretty big economies.
This is the first real moment of truth for the euro. I honestly don't know if it'll survive as we know it. I don't think it's likely to collapse altogether, with the eurozone countries going back to their old national currencies, but it's possible that when the dust settles, one or more of the weaker countries will leave the EMU, and at the very least it's likely that the Baltic states lining up to join will find their wait suddenly lengthened.
IMO this is a tragedy that Europe has brought on itself. We played fast and loose with the entrance criteria, both for the EU and for the euro, for political reasons. Greece, Romania, Bulgaria, Latvia, and Lithuania (at least) have no business being in the EU, let alone the eurozone; their economies, and in many cases polities, just aren't robust enough. We took them in for any of a number of political reasons -- to bring the former Socialist countries into the Western orbit, or in an attempt to stabilize the chronically unstable, corrupt, and misgoverned Greece.
That was misguided kindness. The EU can only work if the countries in it are roughly on the same page politically and economically; it can give a bit of a leg-up to countries that are a bit weaker but are solidly on the right path, as the successful example of several other former Socialist countries shows. However, the EU can't do a country's work for it, and countries looking for quick short-term benefits will get bitten in the long run. Now we all pay.
Once the EU comes out of this, it'll look rather different. I'm pretty sure that we'll see the official emergence of a multi-tiered system, with a core of rich, stable Eurozone/Schengen Area countries, a second tier of countries with a realistic possibility of joining the core but not yet there, a third tier of countries that are EU but neither Eurozone nor Schengen, nor about to join immediately, and a fourth tier of "hang-around members." I also believe this structure will fairly quickly stabilize, with countries mostly remaining where they are, except perhaps the most successful of the second-tier countries eventually joining the core. I have no idea what that'll mean, globally, but things will be different, for sure.
Put another way, the Greek government just drove off a cliff. They're deeply, deeply in debt, and with costs like that, they have no way to service it. This means one of two things: default or a very expensive bailout by the Eurozone big economies.
Both are bad news.
Default would wreck the Greek economy even worse than it's wrecked now. It's also stuck between a rock and a hard place: to get back on its feet, it badly needs to devalue, but it can't, because it has the euro. OTOH it can't give up the euro, simply because the logistics of that operation are so fiendishly complicated that it can't afford to. That can mean only one thing: deflation. Deflation means a protracted period -- say, three years at an absolute minimum, and could easily be 10, 20 years or even more -- of very high unemployment, falling wages, falling prices, and a dramatically falling standard of living.
A bailout, OTOH, is incredibly unpopular among the countries who could afford it, in particular the Germans and the French -- they're not at all happy about throwing money at Greece, especially as their wrecked economy is largely due to dishonest dealing by their government. However, if they *don't* bail Greece out and allow it to go into default, it'll drive up interest rates all over Europe, and may well cause the next dominos to fall -- Portugal, Spain, Ireland, and Italy aren't doing too great either, and Spain and Italy are pretty big economies.
This is the first real moment of truth for the euro. I honestly don't know if it'll survive as we know it. I don't think it's likely to collapse altogether, with the eurozone countries going back to their old national currencies, but it's possible that when the dust settles, one or more of the weaker countries will leave the EMU, and at the very least it's likely that the Baltic states lining up to join will find their wait suddenly lengthened.
IMO this is a tragedy that Europe has brought on itself. We played fast and loose with the entrance criteria, both for the EU and for the euro, for political reasons. Greece, Romania, Bulgaria, Latvia, and Lithuania (at least) have no business being in the EU, let alone the eurozone; their economies, and in many cases polities, just aren't robust enough. We took them in for any of a number of political reasons -- to bring the former Socialist countries into the Western orbit, or in an attempt to stabilize the chronically unstable, corrupt, and misgoverned Greece.
That was misguided kindness. The EU can only work if the countries in it are roughly on the same page politically and economically; it can give a bit of a leg-up to countries that are a bit weaker but are solidly on the right path, as the successful example of several other former Socialist countries shows. However, the EU can't do a country's work for it, and countries looking for quick short-term benefits will get bitten in the long run. Now we all pay.
Once the EU comes out of this, it'll look rather different. I'm pretty sure that we'll see the official emergence of a multi-tiered system, with a core of rich, stable Eurozone/Schengen Area countries, a second tier of countries with a realistic possibility of joining the core but not yet there, a third tier of countries that are EU but neither Eurozone nor Schengen, nor about to join immediately, and a fourth tier of "hang-around members." I also believe this structure will fairly quickly stabilize, with countries mostly remaining where they are, except perhaps the most successful of the second-tier countries eventually joining the core. I have no idea what that'll mean, globally, but things will be different, for sure.
- Joined
- Oct 19, 2006
- Messages
- 8,540