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Why Greece matters...

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The latest turmoil in the financial markets can be traced to nervous bond investors in Europe. Standard and Poors (S&P), the rating agency, has recently downgraded Greek bonds to BB+, that is, junk status. Soaring public debt and the inability to finance even modest day to day government spending has placed Greece on the road to insolvency. In different times a similar situation would precipitate a mild devaluation of the national currency. As drastic as devaluation is it generally brings in line the true value of the money compared to other international currencies. But, here's the problem. Greece, like much of Europe, no longer has a national currency. In 1999 the European nations conjoined to form as single monetary system... the Euro.

Over the last decade the Euro has become the darling of many hedge fund traders, that is, hedging against the dollar's demise as the reserve currency. But bigger minds have seen the structural flaw in the Euro's creation. Simply put, it is the Euro's inability to adjust spending to revenue.

All currencies are tied to the ability of a country's taxpayers to withstand a certain tax burden. Too low a burden and a country wastes its ability to grow infrastructure, educate its people, or serve a social good. This leads to an uncompetitive market structure and perpetuates a stagnant economy. Too high a tax burden a country suffocates under the weight of its own debt, again creating an uncompetitive environment.

Unlike the dollar, the Euro has no mechanism to assure the countries within the European market balance their budgets; so as frugal as Germany may be, if Greece spends like a there's no tomorrow, the Euro sinks and there's little the rest of Europe can do. For all its faults, the dollar maintains currency equilibrium because the states are required to balance their budgets (if the Budget Enforcement Act were still in effect, the same might said about the Federal Government; alas it is not). So what will happen to Greece and why should we care?

The European nations -- those not in crises -- will begrudgingly come to the rescue. But it won't be cheap. Expect somewhere in the neighborhood of $120 billion just to keep the ship afloat. So, too, the International Monetary Fund will have to kick in. Like the iceberg analogy, Greece is merely the tip: Portugal, Italy and Ireland all have upside down balance sheets. What may have started with a sub-prime Wall Street meltdown, Lehman Brothers credit default swap, collateralized debt obligation, Dubai sovereign debt arrears, bank bailouts...may end up with collapse of a major international currency...the Euro.

The circumstance speaks to what can happen when international organizations, nations, states, counties, cities or a family disregard balancing expenses with revenues. In the end, the Euro and Greece is a cautionary tale of the need for fiscal management.



Copyright 2010 The Dispatch, Eatonville, Washington. All Rights Reserved. This content, including derivations, may not be stored or distributed in any manner, disseminated, published, broadcast, rewritten or reproduced without express, written consent from SmallTownPapers, Inc.

© 2010 The Dispatch Eatonville, Washington. All Rights Reserved. This content, including derivations, may not be stored or distributed in any manner, disseminated, published, broadcast, rewritten or reproduced without express, written consent from DAS.

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