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The Greek Election and Economic Crisis – Something Happening Far Far Away?

June 16, 2012 - Ray Tsuchiyama
New York Times Editorial How Greece Squandered Its Freedom

Greece’s population is about eleven Hawaii’s – 11 million citizens – or about the size of Ohio. Even the “Sunshine State” of Florida is far larger with 19 million citizens than Greece, the historical “cradle of democracy”.

Greece has an illustrious and proud past: recall Homer, Sparta, the Athenian democracy, Alexander the Great, Greek letters and literature, the Olympics, beautiful classical buildings like the Parthenon.

Yet the 20th century was not kind to Greece with German occupation, a terrible post-war civil war, and many years of frustrating economic stagnation.

In the 1980s Greeks believed that their government (and economy) got its act together and their country became a real member of Europe (1981), with the adoption of the Euro* (1999), a part of the European Union. However, the Euro, though a solid currency (shared by 17 countries and 350 million people daily, plus 150 million more in African states with their currencies linked to the euro), would make Greek exports less competitive, causing widespread unemployment, less consumption – an economic death spiral.

In order to fuel government social programs, Greek bank borrowing (in Euros) in spite of lower tax collections (realistically speaking, no future tax revenues exist to pay back huge government loans). Soon other European Union countries (especially Germany and France) and their central banks became seriously impatient with Greece and told Greece to shape up, stop spending, start saving, and clean up its finances, including collecting all taxes due from Greek citizens (this is extremely frustrating to Greeks, as there is now 23%+ unemployment and the specter of curtailing government social spending, since that was paid by loans from other countries), plus levying even more taxes.

In response, panicked Greeks had a knee-jerk reaction (although totally understandable): they withdrew billions of Euros out of banks (estimates are over $40 billion), exacerbating the crisis even further – like throwing gasoline on a house fire.

Greece has a $300 billion economy, the 35th largest Gross Domestic Product in the world, yet within the European Union is dwarfed by Germany, with a $3.5 trillion economy or ten times as large. European banks – led by Germany and France (with aging populations that save a lot and have government fiscal discipline with low inflation) -- lend in Euros and expect to be repaid in Euros, not in the drachma (the Greek currency before Euros). If Greece bolted from the Euro currency zone, everything in Greece will be re-denominated in drachmas, from jeans to cars to gyros – and to a German or French tourist, everything will be cheaper, since the drachma will decline in value vis-à-vis the euro (yet for Greeks, everything imported, like oil, would increase dramatically in value).

Tomorrow on Sunday the Greek national elections will be held. But Greek national elections were held just a month ago in May. But the results were inconclusive – no one Party had a majority. As the New York Times editorial (see above) described one party choice: “ . . . New Democracy, a center-right party (has) done much to undermine Greece’s economic reform and revival over the past two years. It refused to support the bailout agreement signed by the Greek government, the European Union and the International Monetary Fund on the grounds that it would stifle growth and so it undermined initiatives like tax reform that would have helped combat tax evasion by self-employed professionals and businesses. Yet it is now presenting itself as the responsible force that will stick to austerity and keep Greece in the euro zone.”

According to the editorial writer, the other political choice is Syriza, “a fractious coalition of 12 radical groups that has anointed itself the herald of leftist change throughout Europe and declares that it will immediately annul the bailout agreement while demanding that our partners continue to lend (Greece) money. The latter course could lead to the country’s swift exit from the euro and a chaotic and unpredictable future”.

Between these two parties, a far-right group has emerged in the economic crisis: the Golden Dawn party exhorted Greek nationalist identity with an anti-foreigner, anti-immigrant platform and won 7% of Greek votes in the May elections. In the post-elections press conference, the Golden Dawn leader presented a frightening scene, like a bad dream evoking European fascist leaders of the post-World War I economic and political turmoil:

Golden Dawn Political Party Press Conference May 2012

This video post is very scary for a Greek citizen living in the Athens, the capital city – the financial crisis has begat a political crisis. That is, 7% of all Greeks agree with Golden Dawn that the Greek economic crisis is due to immigrants and foreigners, and if they all left tomorrow, Greece would be a prosperous country once again.

A country moving from the stable Euro backwards to its own previous currency is unprecedented in history. No one really knows all the “extreme” things that could happen if little Greece dropped the Euro.

And how would it affect people in Kahului or Honolulu or Hilo? Why would a Hawai’i family care about Greece’s problems?

There is no financial expert who will argue otherwise that when Greece stops using the Euro as its currency, this will trigger some turmoil throughout the global financial system.

However, although the “extreme” case has the Greek government defaulting on debts, and then failures of European banks (which hold Greek bonds, which are like loans to the Greek government) – which impacts liquidity and a “freeze” on credit globally (like the aftermath of the September-November 2008 “Lehman Shock”, no one can say if these “extreme” extreme projections will happen.

One thing is certain: the Euro, second largest reserve currency, as well as the second most traded currency in the world after the U.S. dollar, will be under siege, as other countries with economic problems may re-think their financial positions, and decide it could do better (for the future of its citizens) to return to its own currency.

This is like a country-government level “every man for himself” political strategy.

Yet, from the early 2000s the euro has become a dominant currency in the world**: by early 2012, with more than €890 billion in circulation, the Euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar.

The nightmare scenario at other at-risk countries (like Spain, Portugal and possibly even Italy) is a repeat of what Greeks are doing every day – withdrawing Euros from banks. Greeks fear that the Greek government will suddenly convert all Euros into drachmas, and drachmas would be worth half or less than Euros (when you have a loan in Euros, that is like doubling all your loans and credit card debts overnight).

Cash-strapped European governments may come for loans to the International Monetary Fund, but the IMF has 188 member countries; from the U.S. to Japan to South Korea to Australia to even India government leaders will balk at losing more money if the $28 billion already loaned to Greece is written-off, which looks inevitable.

At this point the financial crisis in a little country in southern Europe begins to impact people in Hawai’i. For example, there are millions who hold IRAs or have invested in money market mutual funds. Many funds have bought European stocks or currency – if they tank, so do the returns on mutual funds, affecting consumption (people, Mauians included, buy more things or travel more based on a good mutual fund returns or the sense that their stock portfolio is of higher value than before – so this economic turmoil may affect tourists coming to Hawai’i, contributing to uncertainty for tourism for this year).

On the other side of the Atlantic, European banks buy U.S. mortgage bonds, and if they start selling, this triggers a rise in U.S. mortgage rates, slowing-down the current cautious rising Hawai’i real estate market. (The U.S. stock market will also suffer, just like in fall 2008, as foreign investors leave the market and domestic investors buy gold or just park their money in a safe deposit box.)

Just like after the “Lehman Brothers” shock, oil prices would go into free-all, and gasoline prices will drop down perhaps 20 - 30 cents a gallon – and ironically this would increase car sales, delay conservation, and slow Electric Vehicle adoption in Hawai’i – a mixed blessing. Finally, the disturbing longer-term projection is what happens to Greece -- as citizens actually vote for the Golden Dawn party -- in the next year, the next three years?

*On a business trip to Europe as late as 1998 I remember my pockets overflowing with four different currencies when I traveled from London to Paris to Brussels to Amsterdam. Even then I thought it would be advantageous to have a single currency. One user-friendly feature of Euro banknotes is that as the bill increases in value (from 5 to 10 to 20 Euros), the paper bills are larger – a positive design move for visually-challenged people. But this is not a recent innovation, as Japanese and People’s Republic of China paper currency sizes are also based on value.

**Probably very few Mauians have seen a euro bill and will be surprised by how brightly-colored they are, with designs of different architecture and regions in Europe, from Portugal to France to Germany to Italy. There are no human faces on the bills, as no country representative is highlighted over another. South African currency has many wonderful native animal images.


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