Greek Economy: What’s Up?
So Greece is in turmoil, and the markets have realized it. The country spent far too much on social programs and other spending and now has a very serious deficit. The deficit, though, is further compounded by a much greater problem in that Greece doesn’t control a central bank.
Central banks produce money, the engine of the modern economy. In Europe, the Euro is the currency and it is controlled by the European central bank. The European Central Bank sets monetary policy for the whole of the region, and thus many different countries are affected when the ECB changes monetary policy.
Greece vs. US
The United States has its own central bank, the Federal Reserve. The United States cannot default on its debts in the traditional sense because it can, at any time, just print up money to pay off its debts. Sure, it can cause inflationary pressure, and printing money isn’t generally good for the economy, however…
Printing money also means that it can, at any time, deliver enough dollars to satisfy a debt! Greece can’t do that.
Investors who own Greek debt have to rely on the Greek government to turn a profit in Euros to pay back its debt. If Greece is spending money like crazy, or if it simply cannot afford record high costs to service its debt, then it can’t pay off investors. Investors, then lose money. In the United States, printing money would allow the US to pay back its debt in the form of inflationary costs for everyone. Greece can’t transfer its debt to every Euro holder, though they’d like to.
This is one of the best powers a central bank has, although it is quite controversial. In the US, a liquidity program designed to boost the US economy has sparked inflation concerns. This inflation has been most evident in commodities and other goods, but has been largely deflected by a rise in investment assets. If you hold investment assets, you’re beating inflation. If you don’t, then…well, you’re taking a licking!
So in short, the Greek economy is underwater because it cannot bail itself out. Other, more powerful countries stand in the way of Greece, which would prefer to inflate away its debts.